Valuation / Recommendation

We initiate coverage on UWC Berhad with a BUY recommendation with a TP of RM3.67 based on FY23F EPS of 10.4 sen and a PE of 35.3x, in line with the 10-year average of the technology industry. We like the stock for its attractive expansion plans and strong track record, well-positioned to leverage on the growing world semiconductor market which is forecasted by the World Semiconductor Trade Statistics (WSTS) to grow by 16.3% and 5.1% in 2022 and 2023.

Investment Highlights

One-stop solution centre. UWC is a one-stop solution centre providing module to full turnkey assembly manufacturing of automated test equipment (ATE) ranging from semiconductor to life-science industry. The new 5G mm wave tester project for smart devices and vehicle-to-vehicle (V2V) communication sensor emulator project is expected to commence by 2H22 and contribute RM50m to revenue annually. The company expects to sell 10 units of testers and 10 units of emulators per month.

Capacity expansion. In FY21, UWC acquired a 120k sq ft plant in Taiping to increase its production capacity on the provision of finishing treatment and sheet metal fabrication, which commenced operations in April 2022. The company also acquired a 12.1-acre land in Batu Kawan and plans to build a new factory with a built-up area of approximately 500k sq ft, which will increase its total floor space to more than 1 million sq ft, expected to complete within 1H24.

Approximately RM200m worth of capex will be allocated for this plant, equally utilised across the next 3 years.

Bulk of the space will be utilised for the semiconductor segment, catered for customers from the front-end. We think that with the completion of the 4th plant in FY24, the company is well-positioned to leverage on the growing world semiconductor market which is forecasted by the World Semiconductor Trade Statistics (WSTS) to grow by 16.3% and 5.1% in 2022 and 2023. The company is also building a 30k sq ft mezzanine floor in its 2nd existing plant to expand its current capacity. The extra space will house 4 to 5 CNC machines, whereas construction of the floor is expected to complete within 1H23.

Strong order book and track record. The company has an order book of RM190m, expected to be fully recognized within 1H23, with the arrival of more workers. Under the leadership of Group CEO Dato’ Ng Chai Eng who is responsible for the overall management and business operations of UWC, the company was able to achieve a revenue and profit after tax record in FY21, and a 3-year revenue CAGR of 27.8% from FY18 to FY21, despite the COVID-19 pandemic in FY20.

Risk factor. (1.) Fluctuation of raw material prices (2.) Labour shortages.

Source: Mercury Securities Research - 18 Jul 2022