INVESTMENT MERIT

- 5-year revenue CAGR of 14.6%. UNIMECH is an under-researched growth stock with a strong track record of revenue and earnings growth. Its revenue and net profit have grown at a 5-year CAGR of 14.6% and 9.1% respectively, with growth being driven by the group’s burgeoning overseas contribution. During this period, revenue from its overseas segment has more than doubled from just RM35m in FY07 to RM95m in FY12 and management expects this overseas contribution to make up for half of the group’s revenue this year.

-  Indonesia to drive growth. Among the bright spots in the overseas segment include Indonesia, which has grown at a 5-year revenue CAGR of 41.4% to RM51m in FY12. Going forward, management aims to grow its Indonesian contribtion by a further 40%-50% this year, and a planned listing of UNIMECH’s Indonesian subsidiary (PT Arita Prima Indonesia) later in the year should pave the way for its foray into the bustling Oil & Gas market as well as to expand its product range beyond the valves and fittings segment.

-  On an expansion track! UNIMECH also sees significant scope for further expansion in other countries such as Thailand, Vietnam and Myanmar, while on the domestic front, management has already identified the marine & shipbuilding, waste water and waterworks sector as the key areas of focus to drive growth. Access to cheap sources of funds has thus far been a limiting factor for the group’s expansion plans, but this is set to change with its corporate exercise below.

-  Proposed rights issue with free warrants. UNIMECH recently proposed to undertake a renounceable rights issue of up to RM33.3m nominal value of 5-year 5.00% ICULS at 100% of their nominal value of RM1.00 each on the basis of one (1) ICULS for every four (4) existing UNIMECH ordinary shares, together with new free warrants on the basis of two (2) warrants for every one (1) ICULS subscribed for. The proposed corporate exercise will not only result in interest savings of approximately RM120k, but will also enable the group to finance its expansion plans (API certified  assembly lines for the Oil & Gas sector) and working capital requirments (Thailand and Vietnam markets).

-  Fully valued at RM1.31. We are projecting a 17% rise in its FY13 earnings to RM25.7m with a NDPS of 4.6 sen, based on a 30% payout. We value the stock at RM1.31/share @ 8.5x FY13 PER, which is in line with the FBMKLCI Small Cap index valuation, which is also trading at 8.5x. However, in view of the limited capital upside, we suggest investors to keep a watch on the stock for now and probably look to buy in any share price weaknesses.

TECHNICALS

-  Resistance: RM1.33 (R1), RM1.43 (R2)

-  Support: RM1.20 (S1), RM1.05 (S2)

-  Comments: UNIMECH has been trading within an obvious trend channel since the middle of last year. Following a failed retest of the channel resistance last week, we expect a short term retreat towards the RM1.20 support in the coming days. Strong buying interest would likely be present at RM1.20.

BUSINESS OVERVIEW

A leading regional engineering group. From its humble beginnings as an engineering sub-contractor, UNIMECH has grown into a leading regional engineering group specialising in combustion equipment, HVAC systems and related piping systems. UNIMECH now boasts a vast distribution network not just in Malaysia, but also across the region with a customer base of 5,000-strong in a wide range of industries including general industries, oil & gas and marine ship bulding.

CORE BUSINESS SEGMENTS

-  Unimech currently produces its products under its seven own brand names – Arita, Unijin, Q-Flex, Bells, Allen, Icontronic and Sanitario.

-  Products aside, Unimech is also engaged in system design, project implementation and maintenance services.

-  Unimech’s more than 10,000 products include (by revenue):

1) Vales, Instrument & Fittings (82%)

2) Pumps (10%)

3) Electronics (3%)

4) Others (5%)

Source: kenanga