UWC Berhad (“UWC”) (KLSE: UWC) is an integrated engineering support services provider, mainly dealing with the provision of precision sheet metal fabrication, assembly services and the fabrication of precision machined components. 

Since its listing on 10 July 2019, UWC’s share price has appreciated over 1,100%, from its initial public offering (IPO) price of RM0.82. If you are looking at UWC with interest, here are 10 things to know before you invest.  

1. Business activities

UWC operates out of Batu Kawan, Penang where it has a 2-storey office building and detached factory with a total built-up of 5.9 acres. 

Essentially, the group specializes in the shaping of sheet metals and metal block customised as per customer designs and specification into intermediate metal products ranging from metal piece-parts to precision machined components. This generally involves various processes such as cutting, forming, joining, as well as other associated processes like abrasive blasting, silkscreen and painting. 

In addition to metal fabrication, the group also offers convenience as a one-stop solutions centre via the provision of value-added assembly services whereby the intermediate metal products it fabricates along with other components procured are either sub-assembled into metal chassis, metal enclosures, and machine structures or fully assembled into finished products. 

The diagram below illustrates the business activities conducted by the group. 

(Source: IPO prospectus)

2.  Business segments and principal markets 

The group has two main business segments, namely: (i) sheet metal fabrication and assembly, and (ii) precision machining services. Historically, sheet metal fabrication and assembly has been the larger of the two business segments, contributing over 80.0% of total group revenue. 

(Source: IPO prospectus)

Geographically, the majority of UWC’s products are sold locally. UWC also exports to various countries like Singapore, USA, China, France, the United Kingdom and others. 

(Source: IPO prospectus)

3. Major customer dependency   

UWC’s main customers include multinational corporations in the semiconductor, life science and medical technology, and heavy equipment industry. The group’s top 5 customers have traditionally contributed over 70.0% of the total group revenue. 

(Source: IPO prospectus)

It is mentioned in the IPO prospectus that Customer A is principally involved in the manufacturing and distribution of information technology products such as motherboards, processors, Ethernet products, chipsets and software. It is a Malaysian-based indirect subsidiary of an established global multinational semiconductor chip maker, which is listed on the Nasdaq Global Select Market in the USA. 

UWC’s customers typically do not enter into long-term contracts and the majority of its sales are based on purchase orders received from time to time. Therefore, the group’s performance is dependent on its ability to secure repeat orders from customers. Nonetheless, UWC has established long-standing business relationships with its major customers. This helps ensures sustainable customer retention as well as business continuity and growth. 

4. How the IPO proceeds are used

In a bid to increase its capacity and improve efficiency, the bulk of its IPO proceeds of RM57.4 million (i.e. RM32.1 million or 56.0%) is earmarked to finance the purchase of new CNC machines and industrial robotic equipment, as well as a material system to enhance its automation process. Remaining IPO proceeds will be used to pare its borrowings (31.3%), fund working capital (5.0%) and defray listing expenses (7.7%). 

(Source: IPO prospectus)

5. Future plans and business strategies 

UWC’s expansion plans include three key areas:

  1. Expansion of production capacity and improvement in production efficiency – UWC has plans to invest in new or additional machinery to cater to new production processes while improving manufacturing efficiency to support rapid product turnaround time and drive cost reduction. The group is expected to allocate part of the proceeds of the IPO to purchase 29 new CNC machines, increasing the maximum production capacity by 18.6% to 569,100 hours per year, from 480,048 hours per year.
  2. Expansion of service offerings – The group has plans to expand its in-house capabilities by setting up a plating line to provide a more comprehensive range of services, maintain quality over surface treatment processes and shorten delivery lead time. Plating surface treatment services are anticipated to commence by 2021.
  3. Automation of production processes – UWC intends to use a portion of the IPO proceeds to purchase industrial robotic arms and material handling system. Furthermore, the group is also in the process of identifying and implementing the automation of more complex activities in their production processes such as laser cutting, bending, painting and assembly processes. 

6. Industry outlook and growth prospects

UWC can be categorised as part of the engineering support industry (ESI), which is involved in the production of intermediate metal products that are used to produce various finished products. ESI comprises two user industries, the machinery and equipment (M&E) industry and the end-user markets. 

In Malaysia, the performance of the ESI industry is heavily influenced by the cyclical nature of technology-based user market, notably the semiconductor industry, where the frequent introduction of new or better electronic devices causes old technology to become obsolete at a faster pace. The estimated market size (in terms of sales value of manufactured products in Malaysia) and growth forecast is as follows: 

In 2019, UWC holds a market share of 1.6% of the domestic ESI market, based on its revenue of RM144.3 million against the total ESI market size (in terms of sales value of manufactured products in Malaysia) of RM9.2 billion. This show ample room for UWC to grow its market share. 

Going forward, UWC’s long term prospects remain sturdy due to megatrends of 5G and Internet of Things (IoT). The invention and advancement of new technologies can drive up the demand for products in the semiconductor, life science and medical technology industry, and in turn, increase the demand of intermediate metal products. 

7. Substantial shareholders 

(Source: 2019 annual report)

Dato’ Ng Chai Eng and Mr. Lau Chee Kheong are the largest shareholders of UWC with an indirect stake of 52.6% by virtue of their shareholding in UWC Capital Sdn Bhd while also holding a direct stake of 9.1% each.

Dato’ Ng Chai Eng is the Executive Director and Group CEO of UWC. Dato’ Ng started his career with Mattel (Malaysia) Sdn Bhd in 1982 as an apprentice electrician in the company’s maintenance department and left in 1983 to further his studies, consequently obtaining his certification as an electrician. In 1985, he joined Leader Electrical Appliances Manufacturing Sdn Bhd (now GUH Electrical Appliances Sdn Bhd) as Senior Technician and was promoted to Plant Manager in February 1990. He then left the company in the same year to start the business operations of UWC which he co-founded in August 1990.

Mr. Lau Chee Kheng is the Executive Director and Group COO of UWC and he completed his secondary education in 1980 at a local secondary school in Taiping, Perak. He was employed by Tekshill Component Sdn Bhd in 1980 as a technical supervisor in the manufacturing department and left the company in 1984 to join Toriki Metal Engineering Sdn Bhd as a production supervisor. Mr. Lau joined Leader Electrical Appliances Manufacturing (now GUH Electrical Appliances Sdn Bhd) as assistance factory manager and subsequently left the company in 1991 to focus on UWC that he co-founded with Dato’ Ng Chai Eng. 

8. Financial Highlights  

Financial Year End 
2016201720182019
RM’000RM’000RM’000RM’000
Revenue 76,31192,158136,495144,354
Gross profit 21,44224,93342,87950,786
Profit after tax19,39114,86331,22436,236
Gross profit margin (%)28.127.131.435.2
Profit after tax margin (%)25.416.122.925.1
Return on equity (%)31.020.037.021.0
Current ratio (times)2.01.71.73.9
Gearing ratio 0.20.30.60.1

(Source: 2019 annual report)

UWC is a growing and profitable company. Its revenue and profits have been growing at CAGR of 23.7% and 23.2% respectively over 2016 to 2019. Meanwhile, its profit after tax margins has been consistently above 15.0% over the same period. The company should not have any liquidity issues, since its gearing ratio is kept consistently low. UWC intends to recommend and distribute a dividend of at least 20% of the group’s annual consolidated profits after tax. 

9. Future growth is priced into its current valuation  

With a closing share price of RM9.88 as at 24 December 2020, UWC is trading at a price to earnings (PE) ratio of 79.7, with a market capitalisation close to RM5.4 billion. Given the high PE ratio, there is plenty of investor optimism in the group, and there the company’s stock is priced for perfection. It may be wise for investors to wait for a better opportunity before considering an investment.   

(Source: Google Finance)

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