Unimech  is  a  one-stop  provider  for  combustion  and  heat  generation  equipment  such  as  valves,  fittings,  instrument  gauges.  Its fundamentals  are  underpinned  by  its:  (i)  regional  presence  in  Malaysia,  Indonesia,  Thailand  and  China,  (ii)  aggressive  expansion  plan  in Indonesia, and (iii) product expansion to serve O&G, marine, shipbuilding, as well as water and wastewater industries. Pegged at a five-year average PER of 6.7x on its FY13 earnings, we derive a FV of RM1.22, which suggests a potential price upside of 19.8%.

Experienced  engineering  equipment  provider.  Unimech  has  over  30  years  of  experience  in  system  design,  fabrication,  manufacturing  and distribution  of  all  kinds  of  valves,  instrumentation  and  fittings.  It  is  also  involved  in  fabrication,  installation  and  maintenance  of  boilers, combustion equipment and piping systems. It has seven manufacturing facilities in Malaysia (Penang and Perak) and China (Tianjin and Hebei) to produce own brandname products. Its marketing networks in various countries, namely Malaysia, Singapore, Indonesia, Thailand, Australia, the  Philippines,  Korea  and  China  distribute  6,000  to  7,000  types  of  products  to  cater  to  various  needs.  The  company  also  owns  exclusive distributorship of some engineering equipment and components. It caters for over 5,000 dealers, contractors and end-customers with a strong distribution network in Malaysia, Singapore, Indonesia, Thailand, Australia, the Philippines, and China.

Indonesia ' the next growth frontier. The second-largest revenue contributor after Malaysia, Indonesia is set to be the next growth driver. It is the  second-largest  market  after  Malaysia,  accounted  for  about  20%  of  total  revenue  in  FY11.  Unimech  currently  has  32  branches  (equipped with  warehouse  and  marketing  network)  in  Indonesia  and  aims  to  set  up  19  more  in  the  country  over  the  next  three  years  as  part  of  its expansion plan. It also intends to set up plants in Indonesia where its large sales volume offers cost efficiency.
 
Expanding market reach. Historically, Unimech has been serving the general manufacturing sector and palm oil mill industry, among others. In order to sustain its growth, it  plans to expand into oil and gas (O&G), marine, shipbuilding, as well as water and wastewater industries. Early this year, the company's 35%-owned plant in Huangshan, China has obtained the American Petroleum Institute (API) certification, which grants its  access  to  the  O&G  industry.  In  mid-2012,  the  company's valve  plant  in  Penang  obtained  the  Bureau  Veritas  (BV)  certification required  by the marine and shipbuilding industries, making it the only valve manufacturing plant in Malaysia that is BV certified.

Consistent dividend payout. Unimech has been paying dividends since its listing in 2000. The dividend policy of the group is payout of at least 30%  of  its  net  income.  In  FY11,  the  company  paid  a  single  tier  gross  dividend  of  6.7  sen  (net  dividend  of  5  sen)  to  reward  its  shareholders. Based on gross dividends of 6.7 sen and 7.3 sen for FY12 and FY13 respectively, we expect a decent dividend yield of 6.8%-7.5% for this year.

RM1.22 FV. We arrived at a RM1.22 price target, pegged at a five-year average PER of 6.7x on its FY13 earnings.  Given the interdependence between the manufacturing sector and valves and fitting industry, we believe the company will continue to grow. We like Unimech for its: (i) regional  presence  in  Malaysia,  Thailand,  Indonesia  and  China,  (ii)  market  diversification  to  mitigate  concentration  risk,  and  (iii)  aggressive expansion plan in Indonesia.

Over  30  years  of  experience.  Unimech  has  over  30  years  of  experience  in  system  design,  fabrication,  manufacturing  and  distribution  of  all kinds of valves, instrumentation and fittings. It is also involved in fabrication, installation and maintenance of boilers, combustion equipment and  piping  systems.  It  has  seven  manufacturing  facilities  in  Malaysia  (Penang  and  Perak)  and  China  (Tianjin  and  Hebei)  to  produce  own brandname products. The company distribute various types of products which are distributed under six brandnames, namely Arita, Unijin, Q-Flex,  Bells,  Allen,  and  Icontronic.  It  has  regional  marketing  networks  in  various  countries,  namely  Malaysia,  Singapore,  Indonesia,  Thailand, Australia, the Philippines, Korea and China. It also owns distributorship of some engineering equipment and components. Unimech caters for over 5,000 dealers, contractors and end-customers, with a strong distribution network in Malaysia, Singapore, Indonesia, Thailand, Australia, the Philippines, and China. 

Growing  contribution  from  overseas  markets.  As  shown  in  Figure  2,  62%  of  its  total  FY11  sales  came  from  Malaysia.  This  is  followed  byIndonesia and Singapore, which contributed 20% and 10% of total sales respectively. China, the  US and others made up the remaining  sales. Over the years, the company's efforts to grow its overseas markets started to pay off (see Figure 3). Overseas sales contribution surged 48%from RM50.0m in FY10 to RM74.1m in FY11.

Indonesia ' the next growth frontier. The second-largest revenue contributor after Malaysia, Indonesia is set to be the next growth frontier. Despite sharing many common traits in history, culture and religion, sales approaches in the Malaysian and Indonesian markets vary. Unimech typically  sells  to  dealers  in  Malaysia  while  its  Indonesian  operation  mainly  caters  to  end-users.  The  company  currently  has  32  branches (equipped with warehouse and marketing network) in Indonesia and aims to set up 19 more in the country over the next three years as part of its expansion plan. It also intends to set up plants in Indonesia where its large sales volume offers cost efficiency.
 Besides  Indonesia,  Unimech  is  also  looking  to  grow  its  business  in  Thailand  and  Australia.  It  is  eyeing  the  possibility  of  setting  up  a  plant  in Thailand,  which  would  strengthen  its  position  in  the  country  and  potentially  boost  its  chances  of  winning  government  contracts.  It  has allocated RM5m for capital expenditure this year, mainly for setting up plants and branches in Thailand and Indonesia. On the local front, the company's focus is on organic growth, where it recently spent RM10.4m to acquire two warehouses in Petaling Jaya in April and May last year.  

Expanding  market  reach.  Historically,  Unimech  has  been  serving  the  general  manufacturing  sector,  construction  activities,  and  palm  oil  mill industry,  among  others.  In  order  to  sustain  its  growth,  it  plans  to  expand  into  oil  and  gas  (O&G),  marine,  shipbuilding,  as  well  as  water  and wastewater industries. Early this year, the company's 35%-owned plant  in Huangshan, China has obtained the American Petroleum Institute (API) certification, which grants its access to the O&G industry. In mid-2012, the company's valve plant in Penang obtained the Bureau Veritas (BV)  certification  required  by  the  marine  and  shipbuilding  industries,  making  it  the  only  valve  manufacturing  plant  in  Malaysia  that  is  BV certified.

The valves and piping industry provides components that distribute, control and monitor the flow of gases and liquids. Despite being relatively small in size and carrying minimal weight in Malaysia's Manufacturing Index, the industry provides critical support to the whole manufacturing sector  in  conjunction  with  other  components  in  an  integrated  system.  Manufacturing  sector  growth  is  closely  related  to  GDP  growth.  Bank Negara of Malaysia forecast a GDP growth of 4%-5% this year, a decline from 2011's 5.1%. In particular, the manufacturing sector is expected to grow at a slower pace of 3.9% versus 4.5% in 2011 on anticipated slower activity in the export-oriented industries.

Pumps,  compressors,  taps  and  valves  (PCTV)  sub-sector  is  a  sub-component  of  Malaysia's Manufacturing Index.  Figure  6  illustrated  a comparison  between  PCTV  sub-sector  index  and  its  total  manufacturing  value.  During  the  first  seven  months  of  2012,  PCTV  index  was generally higher y-o-y, while total manufacturing value jumped 44% from RM484.0m in 2011 to RM694.7m in 2012. The higher readings could be  due  to  rising  manufacturing  and  construction  activities  in  the  country.  Going  forward,  Malaysia  is  expected  to  maintain  its  expansionary fiscal policy and continue with its Economic Transformation Programme projects that would bode well for the industry growth. 

Positive  1HFY12  results.  Unimech's  1HFY12  results  were  decent,  with  1H  earnings  up  10%  to  RM10.4m  on  a  9%  increase  in  revenue  to RM105.5m.  This  is  mainly  attributed  to  strong  sales  in  the  Indonesia  operation,  which  jumped  44%  y-o-y  to  RM25.6m,  as  well  as  the acquisition of a Thailand subsidiary, which was previously an associate. The company's EBIT margin improved from 16.8% in 1HFY11 to 17.1% in 1HFY12. Valves, instruments and fittings segment remains the largest revenue contributor, totalling RM88.1m as of end of 1HFY12 (+15% y-o-y).

Consistent dividend payout. Unimech has been paying dividends since its listing in 2000. The company's dividend policy is payout of at least 30% of its net income. In FY11, it paid a single tier gross dividend of 6.7 sen (net dividend of 5 sen) to reward its shareholders.  Based on gross dividends of 6.7 sen and 7.3 sen for FY12 and FY13 respectively, we expect a decent dividend yield of 6.8%-7.5% for this year.

Gearing  up.  The  company  has  increased  its  borrowing  to  fund  the  purchase  of  warehouses,  factory  and  inventories.  Its  net  gearing  ratio climbed to 0.3x in FY11 from 0.19x in FY10, which is still below the management's comfort level of 0.5x. We expect the company to ramp up its business expansion and work to strike a balance between its balance sheet and business expansion.

RM1.22  FV.  Over  the  years,  Unimech  has  built  a  strong  foundation  with  good  profitability  record  since  its  inception.  Given  theinterdependence  between  the  manufacturing  sector  and  valves  and  fitting  industry,  we  believe  the  company  will  continue  to  grow.  We  like Unimech for its: (i) regional presence in Malaysia, Thailand, Indonesia and China, (ii) market diversification to mitigate concentration risk, and(iii) aggressive expansion plan in Indonesia. We arrived at a FV of RM1.22, pegged at a five-year average PER of 6.7x on its FY13 earnings.