• MYR2.05 FV on 12x FY22F P/E. As a major domestic valve manufacturer and distributor, we expect Unimech Group to achieve 8% FY22F-24F earnings CAGR on rising demand across end sectors, supported by readily available capacity; new market opportunities through its penetration into the marine and ship building industries; and long term positive synergies through business alliance with KITZ Corp (KITZF US, NR). Trading below peer valuation at just 8x FY22F P/E (global peers: 21x, local peers: 9x), we believe it offers investors a compelling investment opportunity.

• Increasing demand across end sectors. We anticipate demand for UGB’s products to escalate in FY22, as customers would need to replenish their inventory after delaying or reducing their purchases over the last two years. As c.80% of revenue is recurring in nature, we expect the reopening of economic activities, new investments, and capacity expansion by various end industries to lead to higher orders. In view of increasing palm oil production and the Indonesian Government’s plan to increase national shipping ability, we believe the commencement of its new factory in Indonesia is timely to cater to the increasing demand. Overall, we are looking at FY22F revenue to surpass MYR300m (c.+9% YoY).

• Long-term positive synergies with one of the world’s top valve producers. In 2019, UGB a formed a business alliance strategy with KITZ Corp, whereby the former has been granted a distributorship of valves under the KITZ brand, and is able to penetrate the high-end market without having to incur additional R&D cost and build its own brand name. Under this business alliance, both UGB and KITZ are looking to expand their respective market shares by building the ARITA and KITZ/TOYO brand portfolios across the Asian region. Given the products for UGB and KITZ are in different market segments, we anticipate positive synergies for both parties with minimal competition in products. Based on a rough estimation, this alliance is expected to contribute an additional 5-10% in revenue for UGB.

• Lowering debt level progressively while remaining committed to dividend payout. UGB has been paring down its debt progressively, from 0.21x in FY20 to 0.14x in FY21, despite having allocated capex for the new plant in Indonesia – indicating healthy cash inflow. Assuming it maintains its dividend payout ratio at 30% of PAT, we are looking at FY22F-24F DPS of 5-6 sen, or 4% yield.

• Risks: Slowdown in global demand, higher-than-expected increase in raw material prices, and intensified competition. On the ESG front, we are unaware of any significant ESG-related issues.

Source: RHB Research - 9 Mar 2022