UUE Holdings Bhd - Initiation
Tue, 24-Dec-2024 08:49 am
by Tan Sue Wen • Apex Research

Counter

UUE (0310)

Target Price (RM)

1.10

Recommendation

Buy

Summary

  • Specialist in underground utilities engineering services, focusing on HDD solutions essential for modern grid connectivity. We believe UUE is well positioned as a proxy to benefit from TNB's grid upgrade, given its exclusive subcontractor status with its top two customers, whom have been serving TNB for several years.

  • Future core earnings growth will be driven by a robust contract pipeline for electricity works, margin expansion from DC-related projects, subsea development, and a higher proportional contribution from Singapore operations.                                               

  • We initiate coverage on UUE with a BUY recommendation and a target price (TP) of RM1.10, based on a 20.0x PER, pegged to FY26F fully diluted EPS of 5.5 sen and appraised with three-star ESG rating.

 

Key Investment Highlights

 

  • Leveraging onto rising electricity demand. UUE specializes in HDD solutions, critical components for modern grid connectivity, and holds exclusive subcontractor status with its top two customers, whom have been serving TNB for several years. Through NETR initiatives and growing data centers pushing TNB’s capex to RM90bn (2025-2030), we project a 31.1% three-year CAGR in UUE’s core net profit, reaching RM43.1m by FY27F.

     

  • Sustainable orderbook replenishment. As of 31 Aug 2024, UUE’s unbilled order book stood at RM217.0m, providing earnings visibility through FY27F. We expect the order book to grow by 20% annually, driven by UUE’s exclusive HDD status, rising demand for data center connectivity, and stronger margins from its Singapore operations.

     

  • Venture into subsea HDD works. UUE has expanded into subsea HDD solutions, having purchased a RM7.0m Maxi rig HDD machine (expected completion Q4CY24) and signed an MoU with a Taiwan-based subsea specialist. We expect subsea earnings to make a meaningful contribution from FY26F, offering significant re-rating potential due to its niche specialisation.

     

  • Expansion plans. As of 6MFY25, UUE’s manufacturing capacity utilisation reached 74.8%, nearing the optimal 80%. To meet rising demand, UUE plans to: (i) install at least a new three-line production facility by FY27F; (ii) expand capacity by 73% to 1,600 kg/hr at its existing facility, targeted for completion in CY25.

     

  • Valuation & Recommendation. We initiate coverage on UUE Holdings Berhad with a BUY recommendation and a target price of RM1.10, based on a 20.0x P/E multiple pegged to FY26F fully diluted EPS of 5.5 sen, and appraised with a three-star ESG rating.

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