Valuation / Recommendation

We recommend SUBSCRIBING to UUE Holdings, with a FV of RM0.46 based on 13x FY25F EPS, translating to a potential upside of 90% to the IPO price. We believe our target valuation of 13x PE is appropriate for a small-cap construction engineering company (vis-a-vis 19.7x PE for the KL Construction Index). Key catalysts for UUE include strong earnings delivery and major contract wins. We note that listed comparable peers such as MN Holdings (+41% YTD) and Jati Tinggi (+27% YTD) are trading at 22-29x PE, amid strong earnings growth expectations stemming from recent massive investment in data centres and RE projects in Malaysia.

Investment Highlights

Strong tailwind from booming utility sector. UUE is primarily engaged in providing underground utility engineering solutions, specialising in the horizontal directional drilling (HDD) method. With approximately 80% of its revenue coming from the electricity supply industry, it is not surprising that UUE has greatly benefited from TNB’s increased capex spending in recent years to strengthen the national grid infrastructure. With the NETR initiatives further driving elevated capex spending by TNB in the coming years, we believe this augurs well for UUE and expect its revenue to grow at a double-digit 3-year CAGR of 23% over FY23-26F.

Growing geographical presence. UUE’s geographical presence in Johor, Negeri Sembilan, Melaka and Selangor are strategic, as most of the new data centre deployments in Malaysia are concentrated in these states. We expect this to drive a robust orderbook for UUE going forward, which currently stands at RM223m (as of April 2024), representing up to 1.5 years of earnings visibility. The group has also recently started to pursue engineering projects in the East Coast states, and managed to secure projects worth RM84m so far. Last but not least, Singapore is also a significant market for UUE, with steady growth and contributing about 25% to its revenue over the last few years.

Superior margins than peers. Excluding listing expenses, UUE’s recent PAT margins are trending around 15-16%, which is far superior to listed peers such as MN Holdings (6-7%) and Jati Tinggi Group (3-4%). We believe this is mainly due to two key differentiating factors, which are: 1) UUE mainly specialises and focuses on the trenchless HDD method, which offers better margins; and 2) The group has its own HDPE pipe manufacturing, which complements its main business.

Risk factors include (1) High customer concentration, (2) Dependency on subcontractors, and (3) Fluctuation of construction material costs.

Source: Mercury Securities Research - 7 Jun 2024