Valuation / Recommendation

Results were below expectations, achieving 48.0% and 42.0% of our full year revenue and profit forecasts for FY23. Profit was qoq lower due to higher staff costs and loss on foreign exchange.

We revise our revenue and profit forecasts for FY23 and FY24 by -4.5% and - 5.5% – -10.9% in line with softer contributions from the semiconductor segment. We recommend a HOLD on UWC Berhad with a revised TP of RM3.44 based on FY23F EPS 9.8 sen and PE of 31.3x, in line with the 10-year average of the technology industry. We like the stock for its attractive growth prospects, well-positioned to leverage on the growing semiconductor industry which is forecasted by IDC to grow at a 5-year CAGR of 4.93% from 2021 to 2026.

Investment Highlights

Demand for functional testers slowed down due to the transition to 7nm testers, whereas demand for the box-build assembly for the new 5G mm wave tester project for smart devices is picking up with a run rate of approximately 1 unit per month (up from 1-2 units per quarter in the past). Together with the vehicle- to-vehicle (V2V) communication sensor emulator project is expected to contribute approximately RM20m to revenue annually. The company also expect its EV tester products to contribute about RM10m to revenue annually,

Moving towards a higher value chain. We think that there is room for margin improvements due to the company’s strategy of moving towards a higher value chain and providing additional services and value add to its customers.

Healthy order book. The company has an order book of RM135m as of Feb 2023 (75% semiconductor industry, 22% life science and medical industry, 4% others), expected to be fully recognized within 3 to 6 months.

Capacity expansion. UWC’s factories are currently fully utilized at 80% utilization rate. 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. Phase 1 (100k sq ft) of the factory is expected to complete within July 2023 to be utilised as warehouse, whereas phase 2 is expected to complete within year 2025.

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 FY25, the company is well-positioned to leverage on the growing world semiconductor market which is forecasted by IDC. A 30k sq ft mezzanine floor is also built in its 2nd existing plant to expand its current capacity, expected to house 4 to 5 CNC machines. The company is also looking to acquire more land going forward in order to expand its capacity to cater for its existing and pipeline of new customers.

Risk factor. (1.) Fluctuation of raw material prices (2.) Labour shortages. (3.) Slower than expected order flows.

Source: Mercury Securities Research - 20 Mar 2023