• UWC’s FE segment outlook remains positive, with improving orders and following successful qualification of a new FE customer

• The BE volume likely troughed and poised for recovery. Management will be expanding capacity to cater for higher anticipated FE and BE orders

• Reiterate BUY rating with unchanged target price at RM2.70

Rising FE contribution to drive FY25 growth

UWC’s front-end (FE) business now accounts for c.25% of its latest RM140m order book (3QFY24: c.20%), largely driven by orders from its Batu Kawan customer. Management is investing RM90m in new machinery to support incoming FE orders, while Building 7 is currently undergoing cleanroom setup. We expect the new facility to partially commence operations for its FE customer by Nov24. Concerns about the slowdown of its main back-end (BE) customer will result in capacity being allocated to meet rising FE demand. UWC anticipates FE’s contribution to increase to c.30% of total revenue in FY25E. The losses from new subsidiaries have narrowed, with the Johor plant likely to achieve profitability by Oct24. However, the Taiping plant is expected to remain loss-making for the coming 2 quarters.

BE recovery expected to be backloaded in 2HFY25

We believe the BE business will remain subdued in FY25, primarily due to a cautious outlook from its largest BE customer, which makes up for 15% of the total order book. Notwithstanding, we gathered that the rest of the BE business is showing early signs of recovery. Its US-based BE customer, which accounts for c.25% of the order book, has seen test handler production recover to c.65% of the 2022 peak level in Sept24, driven by accelerated AI adoption. Management expects weekly production to reach 15 units by 4QFY25, reflecting a 25% increase from previous peak levels, as demand from the US-based BE customer continues to strengthen.

Reiterate BUY with TP at RM2.70

We anticipate that the upcoming 1QFY25 results will likely face pressure due to the recent US$ currency depreciation. Operationally, management expects higher FE orders to drive 1HFY25 earnings, along with a more meaningful BE segment recovery in 2HFY25. We maintain our 12-month target price at RM2.70, based on an unchanged 35x PE multiple on FY25E EPS. Reiterate BUY rating. Key risks to our BUY call include prolonged sector recovery, which could lead to continued customer order delays and further margin contraction.

Source: Phillip Capital Research - 26 Sept 2024