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UWC to ride next semicon upcycle, a ‘Buy’ at Phillip Research

UWC to ride next semicon upcycle, a ‘Buy’ at Phillip Research

10 Nov 2023

UWC Bhd (UWC) is poised to benefit from the next semiconductor upcycle, rising FDIs into Malaysia amid US-China tensions and the move into front-end semiconductors, according to Phillip Research.

At the same time, the integrated engineering service provider is also expected to benefit from the mass expansion of manufacturing capacity by certain US-based front-end customers and the push for localization bodes well with its long-term prospects.

In an initiation report on the company, Phillip Research has tagged the company a ‘Buy’ with a 52-week target price of RM4.31. The counter closed at RM3.64 yesterday, valuing the company at RM4.01 billion.

Philip Research, a unit of Singapore-based subsidiary Phillip Capital Sdn Bhd, said it expected UWC’s front-end business to grow with management guiding for an initial RM40 million to 50 million contribution (15% of FY24E revenue) from one US-based customer, while working to qualify with another US and European-based front-end equipment customers.

“The front-end market being 6-7x larger over back-end equipment presents a huge growth opportunity. We expect UWC’s initial front-end contribution to gradually ramp up, achieving 25% of total revenue in FY26E,” it said.

World Semiconductor Trade Statistics (WSTS) and industry association SEMI were projecting a 12% yoy rebound in 2024, according to the report, mainly driven by the recovery in the memory segment, which was forecast to rise 40% yoy to reach US$120 billion.

While the memory segment takes the lead, nearly all other segments including discrete, sensors, analog, logic, and micro were poised for recovery. The US and Asia Pacific were amongst the regions which were expected to see the strongest growth.

“The gradual relocation of more semiconductor equipment companies into Malaysia offers increase outsourcing opportunities for UWC,” it said.

UWC’s total factory floor space is expected to increase by 57%, from  675,000 to 1 million square-feet, by the end of 2024 to accommodate the expected rise in future orders.

Coupled with the recent acquisitions aimed to further growth and add customer value, the research house has projected a 3-year profit CAGR of 40.7% across FY23-26E driven by the sector recovery, and improving margins from moving into front-end semiconductors.

POURING INTO PENANG

The report noted that global multinational corporations (MNCs) have been increasing their footprint in Penang, a key tech production centre in Malaysia.

“With the increasing tension between the US and China, we expect the current relocation trend to continue,” it said.

Malaysia’s FDI reached a record high of RM74.6 billion in 2022. Notably, Malaysian Investment Development Authority (MIDA) FDI approvals have achieved RM71.4 billion in the 1Q23.

“We expect UWC to benefit from the trade diversion as more global MNCs shift more of their production hub to Malaysia amid favourable government policies, attractive cost structures and business-friendly incentives,” it said.

TARGET PRICE

The target price was based on a target 35x PE multiple on FY25E EPS.

“We see the ascribed valuation as reasonable (within the peers PE range) on the back of our expectation of a broad-based industry recovery, strong earnings growth and its move into the larger and more lucrative front-end equipment market,” it said in the note dated Nov 8.

UWC specialises in the fabrication and production of metal component parts, as well as provides automated test equipment assembly as an added value service. It serves various industries including semiconductors, life sciences and medical technology.

The company excels in delivering value-added assembly services, either sub-assembling self-made parts or turning intermediate products into finished items. 

Source: The Malaysian Reserve

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