UUE Holdings Bhd - Within expectations
Fri, 24-Jan-2025 07:07 am
by Tan Sue Wen • Apex Research

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UUE (0310)

Target Price (RM)

1.100

Recommendation

Buy

Summary

  • UUE’s 3QFY25 core net profit surged +12.4 qoq to RM7.3m, bringing to 9MFY25 core net profit at RM19.6m, which was within expectations, accounted for 76% of our in-house forecst.

  • End-3QFY24 orderbook remains strong at RM251.8m, equivalent to 1.3x FY24’s revenue. While US rulings on AI chips have dampened sentiment, we gathered UUE’s exposure to data centres remains minimal (<4% of the order book), suggesting the Group is relatively shielded from any potential unfavourable data centre growth prospects.

  • Re-iterate our BUY recommendation with an unchanged target price of RM1.10, pegged to a 20.0x PER on FY26F fully diluted EPS of 5.5 sen, and appraised with a three-star ESG rating.

 

Results within expectations. UUE achieved its strongest quarterly performance since listing. 9MFY25 core net profit of RM19.6m was within expectations, representing 76% of our FY25F earnings forecast.

 

yoy. Since UUE was newly listed back in mid-2024, there is no yoy comparison.

 

qoq. 3QFY25 core net profit surged to RM7.3m (+12.4% qoq), primarily due to stronger contributions from underground utilities engineering solutions in Malaysia (+7.9% qoq) and Singapore (+3.4% qoq). Consequently, core profit margin improved to 15.9% from 15.2%, led by higher contributions from Singapore operations, which fetch better margins.

 

Outlook. UUE currently is equipped with an unbilled order book of RM251.8m (Peninsular Malaysia: 45% South, 44% North, 10% East; remainder from Singapore), equivalent to 1.3x FY24’s revenue, which is expected to be recognised progressively over FY25F-FY26F. Following four contract renewals this month, we expect the momentum of job awards to remain steadfast, especially from the East and North regions. UUE is currently tendering HDD works for 33kV PMU to 11kV PE projects, which are expected to offer faster execution and better margins. To date, UUE’s tender book stands at RM88.6m, with over 70% coming from Peninsular Malaysia.

 

Subsea Development Update. We have been informed that subsea development has been delayed due to land reclamation issues. Nonetheless, the Group is actively exploring alternative onshore land options, as demand for subsea development remains robust in the region, driven by green initiatives and 5G development. We believe that subsea development will require more time to generate meaningful earnings, as the Group is still in the learning phase.

 

DC Exposure. Following reports that the Biden administration plans to introduce an AI Diffusion framework limiting advanced chip exports, UUE share price has fallen by c.9%. However, this ruling has yet to be finalised, with a 120-day comment period to be observed under the Trump administration's policies. Furthermore, we gathered UUE’s exposure to data centres remains minimal, accounting for <4% of the order book. Based on c.1% of revenue elimination from the recognition from data centre works in this quarter, estimated core earnings would still be at record high at c.RM19.0m, suggesting that the Group is relatively shielded from downturn in DC growth. We believe the market is overreacting to UUE, as more than 70% of earnings are derived from recurring TNB jobs, in contrast to data centre jobs, which are typically one-off in nature.

 

Earnings Revision. No change, given that reported earnings came within expectations.

 

Valuation. Re-iterate our BUY recommendation on UUE with a target price of RM1.10, pegged to a 20.0x PER on FY26F fully diluted EPS of 5.5 sen, and appraised with a three-star ESG rating. Given the current undemanding valuations, we believe this presents a good opportunity for investors to accumulate. We like UUE for its (i) specialisation in HDD solutions as its niche with high margins, (ii) strong positioning as a key beneficiary of TNB’s grid upgrade plans, supported by its established relationship with major customers, and (iii) strategic expansion into subsea development, which is anticipated to drive margin growth.

 

Risk. Heavy reliance on its top three customers. Risk of subcontractor non-performance. Inability to secure new contracts.

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