UMC reported 2QFY23 core net profit of RM2.8m (+57.7% QoQ, NA YoY), bringing 1HFY23 core net profit to RM4.6m (-17.2% YoY). Results accounted for 42% of our full year forecasts, which we deem inline as we are expecting stronger performance 2HFY23. In 2QFY23, UMC was affected by a delay in public sector orders due to a change in government, resulting in flattish marketing and distribution revenue QoQ. With the new Budget 2023 now tabled, we are encouraged by the increased certainty and we stay optimistic that UMC could potentially receive more public sector orders in 2H23. Make no changes to our FY23-24 forecast, but TP is raise to RM1.06 (from RM0.78 previously), as we roll over our valuation base year to CY24f. Our TP implies a PE of 26.5x on its CY24f EPS of 4 sen. Given the upside, we upgrade UMC to BUY (from Hold).

Deemed in line. UMediC (UMC) reported 2QFY23 core net profit of RM2.8m (+57.7% QoQ, NA YoY), bringing 1HFY23 core net profit to RM4.6m (-17.2% YoY). Results accounted for 42% of our full year forecasts, which we deem inline as we are expecting stronger performance in the upcoming quarters. UMC was affected by the supply disruption of medical equipment in 2QFY23, as well as a delay in public sector orders due to the change in government. Core net profit was arrived at after adjusting for EIs (mainly realised FV gain on marketable securities) of -RM334k.

QoQ. UMC’s 2QFY23 revenue grew by 10.6%, lifted by the stronger showing from its manufacturing segment (+36.1%), as its second production line has been fully ramped up during the quarter, reaching a combined capacity of 300k units per month. Favourable foreign exchange rate has also contributed to the revenue growth. Marketing and distribution segment, on the other hand, was flat QoQ, as supply disruption persisted and the change in government has led to a delay in public sector orders. Aided by improved economies of scale on its manufacturing segment, favourable forex movements and securing better equipment pricing from its principal, core net profit leaped by a larger magnitude of 57.7%.

YTD. Revenue slid 35.3% mainly due to weaker revenue from marketing and distribution segment (-50%) owing to high base effect (higher ventilator sales in 1HFY22 due to more Covid-19 patients ventilated), supply disruption and delay in public sector orders in 1HFY23. This has offset the stronger contribution from its manufacturing division (+73%), which was supported by an increase in manufacturing capacity. Due to improved economies of scale in the manufacturing segment, core net profit declined by a smaller magnitude of 17.2%.

Outlook. After receiving positive response from potential Spanish and Italian distributors for its prefilled humidifiers, UMC has expedited its expansion plans and kick started the construction of its new factory in Dec CY22 (vs its initial plan of 1HCY23). Construction works are estimated to complete by 3QCY22 and the new facilities is expected to be operational by end-CY24. Separately, with the new Budget 2023 now tabled, we are encouraged by the increased certainty and we stay optimistic that UMC could potentially receive more public sector orders in 2HFY23.

Forecast. FY23-24f Forecasts Unchanged.

Upgrade to BUY, with higher TP of RM1.06. After rolling over of valuation base year to CY24f, our TP on UMC is raised to RM1.06 (from RM0.78), representing a P/E multiple of 26.5x on CY24f EPS of 4 sen. Our valuation reflects a ~24% premium to peer average of 21.4x. The premium is justifiable in our view, as it is compensated by the stronger profit growth. Taking into account the upside, we upgrade our rating on UMC to BUY (from Hold).

Source: Hong Leong Investment Bank Research - 7 Mar 2023