We came away from UMC’s briefing feeling upbeat on its prospects, underpinned by the new avenues it has in place to generate revenue growth. UMC will be looking to venture into contract manufacturing of prefilled humidifiers to improve overall economies of scale and reach more markets by tapping on the footprint of its potential customers. It will also tap into the ambulance service market by investing in an ambulance, as well as leveraging on this service to promote its resuscitation equipment. We make no changes to our forecasts and our BUY rating is maintained with an unchanged TP of RM1.06. TP implies a PE of 26.5x on its CY24f EPS of 4 sen.

Manufacturing. UMC’s manufacturing segment is predominantly involved in the OBM of its prefilled humidifier, HydroX, currently. However, it is now exploring the possibilities of producing for other potential customers as they have received both OEM and ODM request for prefilled humidifiers. We view this positively as this could (i) boost production output to reduce overall production costs, and (ii) tap on the potential customers’ larger footprint to reach more markets. Before being accepted as a contract manufacturer, UMC will be required to undergo strict audits to ensure standards are met and the process would typically take 6 months. Coupled with the need to register the products after the audit stage, the entire process could take up to a year, which would then coincide with the commercialisation of their new manufacturing plant that is expected to be operational by end-CY23.

Growing product offerings. UMC has recently invested in an ambulance as part of its exploration of the ambulance service market. We believe this move is also part of its effort to showcase and educate the medical community on the need of its distribution product, Tempus ALS, which is a resuscitation equipment equipped in the said ambulance. Main function of equipment includes both prehospital monitoring as well as defibrillation, allowing the paramedics to better focus on the patient. Data transmission capabilities also allows real-time sharing of patients’ vitals, waveforms and images with the destination hospital. To kick things off, the ambulance service will be first made available in the Northern region, eventually expanding to more areas, depending on the response. Separately, UMC has also signed on a new principal, Lowenstein, in 2QFY23, adding anaesthetic equipment to its product line-up.

Expanding into lab-related business. UMC has previously guided that it will be venturing into lab-related business by acquiring a company that already has presence in this space. The target firm is currently involved in the distribution of both laboratory equipment and laboratory consumables, and currently there are less than 10 players in the market catering to this space. UMC will be acquiring a 70% stake in the target company and the transaction is expected to complete in April 2023. Though the acquisition will be earnings accretive, we are not expecting significant contribution from this business just yet. UMC sees the potential in the target firm supported by (i) its product involving in tissue processing (for cancer diagnosis), as well as (ii) influx of foreign tourists (most sought after treatment by this patient group is health screening). UMC also does not discount the possibility of venturing into lab consumables (like reagents) manufacturing someday, as UMC can rely on some of its in-house manufacturing capabilities.

Forecast. Remain Unchanged.

Maintain BUY, TP: RM1.06. Maintain our BUY rating, with unchanged TP of RM1.06, 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, as it is compensated by the stronger profit growth.

Source: Hong Leong Investment Bank Research - 8 Mar 2023