This article first appeared in The Edge Financial Daily on September 5, 2019

UWC Bhd
(Sept 4, RM1.50)
Maintain buy with a higher target price (TP) of RM1.74, from RM1.11: UWC Bhd’s financial year 2019 (FY19) core net profit (CNP) of RM28.5 million (+15.6% year-on-year [y-o-y]) exceeded expectation, thanks to robust sales and margin improvement. Apart from foreign exchange (forex) boost, the sturdy set of results was contributed by strong orders from semiconductor customers coupled with favourable product mix (due to a higher requirements) which led to higher gross profit margin. The UWC management is optimistic about FY20, while highlighting the seasonal softness during the year-end festive season. The escalating trade intensity may eventually benefit UWC which provides one-stop solutions as more US companies look for alternatives to avoid import tariffs.

CNP for the fourth quarter of FY19 (4QFY19) was RM11.1 million (+13.3% quarter-on-quarter [q-o-q], NA y-o-y), which brought FY19 CNP to RM28.5 million (+15.6% y-o-y), forming 108.8% of our full-year estimate. The outperformance was attributed to stronger-than-expected top line and earnings before interest, taxes, depreciation and amortisation margin, coupled with lower-than-expected depreciation and amortisation. One-off adjustments in 4QFY19 included listing expenses, government grants, asset write-off disposal, forex gain and miscellaneous income. No dividend was declared.

Q-o-q, its top line rose 22.4% to RM46.9 million due to stronger demand from semiconductor customers, especially for test equipment, and partly aided by favourable forex (RM4.15/US$1 in 4QFY19 vs RM4.09/US$1 in 3QFY19). In turn, CNP strengthened by 13.3% to RM11.1 million due to favourable product mix.

Y-o-y, there was no comparative figure (4QFY18) available as the UWC was only listed in 2019. However, the company commented that 4QFY19 top and bottom lines were mainly contributed by both sheet metal fabrication and assembly, as well as machining segments, mainly from its semiconductor customers.

Year to date, revenue gained 5.8% to RM144.4 million on the back of higher customer orders. CNP improved by 15.6% to RM28.5 million, due to higher requirements from customers such as more stringent quality control and higher product complexity that led to higher gross profit margin.

Despite the ongoing US-China trade tension, UWC remains optimistic about its business prospects in FY20. It is working with potential customers to widen customer base and increase order volume. The company will continue to develop more designs with existing and new customers, improve technology development, process improvement and automation to ensure long-term sustainability.

In view of the above deviations, we tweaked our FY20 and FY21 CNP projections upward by 28.3% and 26.5%, respectively. FY22 estimate is also introduced.

We opine that UWC deserves a higher price earnings multiple given its solid growth trajectory ahead, leveraging on its expansion plan. — Hong Leong Investment Bank Research, Sept 4