This article first appeared in The Edge Financial Daily on March 9, 2020

UWC Bhd
(March 6, RM2.68) 
Maintain hold with a higher target price of RM2.59: UWC Bhd’s second quarter of financial year 2020 (2QFY20) core net profit of RM13 million (+26% quarter-on-quarter [q-o-q]) brought first half of FY20’s (1HFY20) total to RM24 million (+213% year-on-year), forming 53% of our full-year estimate while this matched street’s at 47. 

The outperformance was attributed to stronger-than-expected sales. One-off adjustments in 1HFY20 include government grants amortisation (RM600,000), property, plant and equipment disposal gain (RM12,000) and miscellaneous income (RM82,000).

For the q-o-q, turnover was higher by 17% at RM55 million supported by stronger demand from semiconductor (especially on test equipment) and life science customers. Core net profit surged even stronger by 26% to RM13 million mainly thanks to lower effective corporate tax rate (2QFY20: 21.8% versus 1QFY20: 24.3%).

Top and bottom lines expanded by 72% and 231%, respectively mainly driven by the semiconductor segment. The majority of the group’s revenue was contributed from sheet metal fabrication and value-added assembly services segment, which accounted for approximately 92% of the total revenue. These specialised services deliver one-stop strategic solution to clients, from piece parts up to full assembly of products. 

Order book ended 2QFY20 with RM58 million (+5% q-o-q) and we gathered that this is still on the uptrend.

For outlook, it remains positive about the semiconductor industry. Penang has recorded the highest approved manufacturing investments recently, and UWC sees opportunities in these developments’ spillover effect leveraging on its strength as an integrated engineering support provider. It is engaging new customers constantly to develop prototypes for qualification. UWC is working rapidly with life-science customers to support their contribution on the front line in the analysis of the Covid-19 virus.

We tweak our FY20 to FY22 revenue assumption which eventually lifted core net profit projections by 10%, 15% and 18% respectively.

We opine that UWC deserves a higher price-earnings multiple given its solid growth trajectory ahead, leveraging on its expansion plan. The escalating trade intensity may eventually benefit UWC which provides a one-stop solution as more US companies look for alternatives to avoid import tariffs. — Hong Leong Investment Bank Research, March 6