• MYR0.31 FV based on 9x FY25F (Feb) P/E. UUE Holdings plans to raise MYR30m from its IPO – primarily for business expansion, working capital and listing expenses. We forecast a 3-year earnings CAGR of 24.7%, underpinned by the group’s strategic expansion plans in scale and range of services, a rise in demand for utilities engineering, and its solid outstanding orderbook.

• UUE is a one-stop solution centre that provides clients with comprehensive utilities engineering services that include project planning and management, utility detection and mapping, and horizontal directional drilling (HDD) technical expertise. Its capability to offer end-to-end solutions can reduce costs and streamline processes, thereby ensuring timely project completion. The group’s high-density polyethylene (HDPE) manufacturing arm also complements its utilities engineering jobs, which may enhance margins. Moreover, its manufacturing arm is registered with Tenaga Nasional (TNB MK, BUY, TP: MYR16.10), as an approved supplier for TNB’s projects.

• Rising demand for utilities engineering services. Malaysia’s capex for recurring electricity generation, transmission, and distribution had a CAGR of 9.8% (2016–2023), which points to the growing demand for utility infrastructure. Higher demand for connectivity services in line with National Digital Network (JENDELA) initiatives may also spur investments in utility infrastructure. To capitalise on these prospects, UUE has allocated MYR15.8m (52.6%) of IPO proceeds to purchase new machinery and equipment.

• UUE’s outstanding orderbook stood at MYR223.4m (end-April) should keep it busy for the next 2-3 years. Electricity supply-related works make up the lion’s share (81%), while the remaining 19% is from telecommunications-related jobs. TNB has forecasted an annual capex of MYR10-20bn up to 2050. We view this positively, as management has guided that >50% of the projects are TNBrelated, potentially facilitating UUE’s orderbook replenishment.

• Venturing into subsea HDD. The extension of services into subsea HDD following the planned acquisition of a Maxi rig HDD machine (MYR7m) enables the group to offer more comprehensive service packages. Such diversification should enable UUE to win higher-value projects (with better margins amidst higher specialisation) and attract a broader range of clients, such as those in the water and O&G industries.

• We expect core earnings to grow by 42%, 20% and 13% YoY over FY24-26. The group’s recurring net profit margin should gradually improve to 15-16% in that period, too. We ascribe a MYR0.31 FV based on a target 9x FY25F P/E. For its peers, we selected companies that are involved in telecommunication, power and electricity supply as they are the end-users of UUE’s services. Our target P/E of 9x is at a c.48% discount to the selected peers, due to its much smaller indicative market capitalisation. Our target P/E of 9x is within the 8- 10x P/E range of small-cap stocks under our coverage. Key risks include slowerthan-expected job replenishment and unexpected delays in projects.

Source: RHB Securities Research - 7 Jun 2024