Investment Merits

• Established >20-year track record in distributing medical devices
• High margins from in-house R&D activities
• Completed expansion to double its manufacturing capacity
• Strengthening its presence with new marketing and distribution offices

Company Profile

UMediC (UMC) is involved in marketing and distributing various medical devices – eg life support, ultrasound, and patient monitoring – and has an established track record of more than 20 years. It is the authorised distributor of established international medical device companies, and distributes such products to hundreds of public and private hospital customers. The company is also involved in the development and manufacturing of medical consumables, particularly pre-filled humidifiers and inhaler spaces.

Highlights

Established relationships. UMC’s main revenue contributor (67% of 1HFY24 (Jul) revenue) is its marketing and distribution segment. Over the past two decades, the company has built strong relationships with various medical device companies – eg Philips, Mindray, General Electric, and Merit Medical – to be their authorised distributor. UMC also provides after-sales services and recently ventured into the laboratory segment following the strategic acquisition of Patho Solutions (M). As the company focuses on distributing high-value, critical medical devices, management guided that GPMs will be high, ie between 35% and 40%. As part of the utilisation of its IPO proceeds, UMC will set up new marketing and distribution offices in Kuala Lumpur and Johor. It believes the new offices will provide a better opportunity to market its products, as customers will be able to visit and better test the devices in person.

Factory expansion. UMC’s manufacturing segment is set to drive earnings growth in the next few years following the completed expansion of its new factory. This will double its manufacturing capacity from 300k bottles per month to 600k and, while operations have commenced in 3QFY24, it will gradually be ramped up to full capacity by the end of the calendar year. With an in-house R&D department, UMC will utilise the new space to launch new products and ramp up production on its HYDROX pre-filled humidifiers. Other in-house manufactured products include its AIRDROX inhaler spacer (awarded Malaysia Technology Expo’s best innovation award) and newly launched HYDROX pre-filled nebuliser. The company is able to grow its manufacturing revenue from overseas, particularly from Europe, as pricing of its products is cheaper than the equivalent in those markets without compromising on quality.

Beneficiary of an expanded healthcare budget. In Budget 2024, the Ministry of Health received the second-highest allocation amounting to MYR41.2bn, or a 13% increase over the MYR36.3bn allocated under Budget 2023. We think UMC will be a direct beneficiary of this trend (ie of more allocations), as it will increase the demand for medical equipment and consumables. Some notable items in the budget that will benefit the company include the replacement of beyond-economic-repair equipment (MYR766m), upgrading of dilapidated clinics (MYR300m), and allocations for medicine supplies and consumables (MYR5.5bn).

Company Report Card

Results highlights. 1HFY24 revenue grew by 18%, as both the distribution and manufacturing segments saw increased demand. Core profit increased 9% YoY (after subtracting listing expenses related to the Main Market transfer), as operating costs increased from personnel hires in preparation for the capacity expenses, as well as higher tax rates due to the recognition of non-tax-deductible expenses and overestimation of capital allowances.

Strong net cash position. UMC is in a net cash position following its listing in FY22 (net cash of MYR17.3m in FY23). Its ROE has ranged between 12% and 17% over the past two years. We expect ROE to remain in this range, given that earnings are set to trend upwards.

Dividends. UMC does not have a dividend policy.

Management. Group CEO and Executive Director Lim Taw Seong has been with UMC for over two decades, and started his career as a sales executive. Lim was appointed to his current position in 2021. He has contributed significantly to the company – securing distributorships from multiple established medical device companies, setting up the R&D division, and expanding UMC’s customer network overseas.

Investment Case

FV of MYR0.96-1.05. We believe UMC’s current market valuation is undemanding at just 17x forward 12-month P/E. We derive a FV of MYR0.96-1.05 based on 23-25x P/E on FY25F earnings, which is in line with the 5-year KL Healthcare Index mean. We believe our target valuation is fair, despite UMC’s smaller market capitalisation, due to its stronger forecasted 3-year earnings CAGR of 19%. The stock’s valuation is also well below the current index P/E of 34x. UMC completed its transfer to the Main Market of Bursa Malaysia from the ACE Market on 29 Apr.

Key risks include higher-than-expected operating expenses, slower-thanexpected public healthcare expenditure, and weaker-than-expected demand.

Source: RHB Securities Research - 15 May 2024