Distribution segment: Riding on higher MOH allocation. In the Budget 2024, Ministry of Health (MOH) was granted a 13.5% hike in allocation of RM41.5bn. Of this, RM5.5bn is earmarked for the procurement of essential medical supplies, including medicines, consumables, reagents, and vaccines. This development serves as a positive catalyst for UMC – an authorized distributor for renowned medical device companies such as Philips, GE, and Merit. Meanwhile, the government's continued commitment to enhancing the quality of public healthcare is anticipated to drive an increased demand for medical equipment within the healthcare system. This situation presents a valuable opportunity for UMC to expand its marketing and distribution business in the thriving healthcare sector.

Stronger earnings ahead. UMC guided that there has been an uptick in the opening of tender for medical equipment for the public sector, but there appears to be a delay in the issuance in purchase orders. Despite this delay, we remain optimistic that UMC will see a surge in public orders in 1HFY24f as the MoH utilises the budget allocated for the year to procure medical equipment. Separately, UMC also implemented a pricing revision for its HydroX prefilled humidifier recently and we expect the impact of this to materialize progressively over the coming quarters.

Paving the way to Main Market. UMC has proposed to undertake a special share issue of up to 24.93m shares (approximately 6.67% of its issued shares), in order to fulfil its listing prerequisites of allocating 12.5% of its enlarged share issued to Bumiputera investors approved by MITI. We highlight that UMC is not in dire need to raise funds for working capital and this share issue is primarily intended to fulfil the listing requirements necessary for its transfer to the Main Board. The migration to the Main Market is expected to make the stock more investable and improve participation from a wider pool of institutional investors.

Building a base. Technically, UMC is building a base near the long-term support region of RM0.71-0.73 region. A successful breakout above RM0.78 will spur the price toward RM0.80-0.87-0.90.

Cut lost at RM0.67.

Collection range: RM0.70-0.72-0.73

Upside targets: RM0.80-0.87-0.90

Cut loss: RM0.67

Source: Hong Leong Investment Bank Research - 3 Nov 2023