This article first appeared in The Edge Malaysia Weekly on May 11, 2020 - May 17, 2020

FOR many companies and organisations, the Covid-19 pandemic has underscored the growing and urgent need to increase automation and artificial intelligence in their daily operations and to be less labour intensive where possible.

Consequently, the demand for technological devices and equipment is likely to rise in tandem, benefitting companies in the supply chain so long as they maintain their quality and keep their costs competitive.

One such company in Malaysia that is aiming to meet the growing demand is UWC Bhd — an integrated engineering support services provider principally involved in the manufacture of automated test equipment for players in the semiconductor, life science, medical technology and heavy equipment industries.

UWC, which was listed in July last year, continues to impress as it has grown its profit and orders quarter by quarter.

Its earnings rose from RM8.82 million for the quarter ended April 2019 to RM13.3 million for the latest quarter ended January 2020, on the back of RM54.9 million in revenue.

“The increases in earnings were in line with revenue growth, which, in turn, was attributed to the increasing demand from our semiconductor and life science customers, especially for test equipment,” says deputy group CEO Matin Ng Chin Liang, adding that UWC will continue to ride the growth of these industries.

The company has plans to move higher up the value chain into the technological devices and equipment supply sector by undertaking the manufacturing of front-end semiconductor equipment, 5G test equipment and more complicated life-science equipment.

“We believe these industries will be UWC’s catalyst for the next few years,” Ng says in replying to questions from The Edge.

As at Jan 31, 2020, the semiconductor segment accounted for 70% of group revenue, followed by 19% from the life science and medical technology segments, he adds.

While the group has seen its profit rise over the past four quarters, the Covid-19 pandemic might break its earnings streak as it was only allowed to operate at 50% of its workforce capacity during the Movement Control Order (MCO) period.

Since the MCO stretches from March 18 to May 12, part of UWC’s financial quarter ended April 30, 2020 (3QFY2020), will be affected. Nevertheless, the company is mobilising its workforce to catch up on lost time after the MCO was relaxed on May 4.

Ng remains optimistic about the group’s outlook and expects demand for technology products to persist in the semiconductor and life science sectors, “albeit [with] slightly deferred priorities in different products from clients due to the current pandemic situation”.

In particular, UWC sees great prospects in the application of Internet of Things (IoT), 5G, automotive sector, augmented/virtual reality and AI.

“With the introduction of 5G, this drives demand for more data, which in turn increases demand for more memory storage for backup servers. Hence, our equipment testers will benefit,” says Ng. “In addition, the implementation of 5G, which requires different radio frequencies, will benefit UWC as we assemble ratio frequency testers.”

In the battle against the pandemic, UWC is currently working with life science equipment customers involved in Covid-19 virus analysis, he adds.

UWC’s rolling order book currently stands at RM60 million, which is sufficient to last three months. Its balance sheet is healthy, with net cash of RM31 million as at Jan 31, 2020.

When the group undertook its initial public offering in July last year, it raised RM57.4 million from the capital market. To date, it has spent RM28.5 million, mostly on repayment of borrowings, working capital requirements and listing expenses.

Of the balance raised, some RM24 million is for the purchase of computer numerical control machines, and RM4.3 million for industrial robotic arms and a material handling system.

Despite its robust earnings growth over the past four quarters, UWC has not been immune to the vagaries of the capital market, especially amid worries of a global recession. Year to date, UWC has lost 27.8% of its market value, ending last Thursday at RM2.31.

But at current levels, the stock is trading at a trailing 12-month price-to-earnings ratio (PER) of 29.27 times, which is higher than the average 17 times among its peers in the machinery, equipment and accessories industry as compiled by AbsolutelyStocks.

Hong Leong Investment Bank analyst Tan J Young, in a March 6 report, raised his earnings projection for UWC for the financial years ending July 31, 2020, 2021 and 2022 by 10%, 15% and 18% respectively.

He opines that UWC deserves a higher PER given its solid growth trajectory, leveraging on its expansion plan, and has raised his target price to RM2.59 from RM1.94 to reflect the higher earnings projection.

“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,” Tan writes.

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