1QFY23 core PATAMI of RM23m (-13% QoQ, -1% YoY) missed our and street estimates. Order book was lower by 21% QoQ RM150m as there was no replenishment from consumer electronics segment. Orders from semiconductor front-end, 5G, EV battery remain intact although some orders are not booked in yet. UWC is optimistic that the demand for semiconductors will continue to be robust. UWC is constructing a class 100 cleanroom facility and the reclamation work on the recently acquired Batu Kawan land is on going and piling works will be conducted subsequently. Downgrade to HOLD with a lower TP of RM4.00, pegged to 34x of CY23 EPS.

Missed expectations. 1QFY23 revenue of RM92m (-11% QoQ, +22% YoY) yielded a core net profit of RM23m (-13% QoQ, -1% YoY) which came in below expectations, accounting for 18% of our and consensus full year forecasts. The deviation was due to lower-than-expected revenue and EBITDA margin. One-off items in 1QFY23 included reversal of impairment losses in trade and other receivables (-RM85k), government grants amortization (-RM0.3m), forex gain (-RM6.3m) and gain on fair value adjustment on marketable securities (-RM50k).

Dividend. None (1QFY22: None).

QoQ. Turnover slipped 11% to RM92m mainly due to a cyclical transition as UWC underwent a strategic shift to gradually adjust itself following anticipated market direction for longer term growth. In turn, core net profit fell by 13% to RM23m as D&A was higher by 7%.

YoY. Sales expanded by 22% mainly attributable to its expanded capacity to cater for growing order book contributed by semiconductor industry development. However, core earnings was lower by 1% impacted by (i) lower adjusted EBITDA margin of 38% vs 1QFY22’s 44%; and (ii) higher D&A by 22%.

Sales breakdown. For 1QFY23, semi: 71% (1QFY22: 77%); life science / medical: 21% (17%); and others: 8% (6%).

Order book was lower by 21% QoQ from RM190m to RM150m as there was no replenishment from consumer electronics segment. Orders from semiconductor front end, 5G, EV battery remain intact although some orders are not booked in yet.

Outlook. UWC is optimistic that the demand for semiconductors will continue to be robust thanks to (i) 5G applications, automotive, smart devices, cloud computing, AI and IoT; (ii) the implementation of CHIPS Act with an allocation of USD52bn to strengthen US semiconductor manufacturing, design and research; and (iii) the introduction of 5G has propelled the testers’ market as 5G devices require high speed chipset. UWC is constructing a class 100 cleanroom facility in Batu Kawan site to cater for front end qualification processes. Moreover, the reclamation work on the recently acquired 12 acres of leasehold land in Batu Kawan Industrial Park is on going and piling works will be conducted subsequently.

Forecast. After tweaking our model based on the deviations mentioned abo ve, FY23-25 core PATAMI were lower by 9%, respectively.

Downgrade from Buy to HOLD with a lower TP of RM4.00 (previously RM4.38), reflecting the downward earnings revision. Our TP is pegged to 34x of CY23 EPS. At current juncture, we think the risk-reward is fair despite the ongoing trade intensity may eventually benefit UWC which provides a one-stop solution as more companies shift productions out of China to avoid import tariffs.

Source: Hong Leong Investment Bank Research - 21 Dec 2022