Background

UUE Holdings Bhd (UUE) specialises in underground utilities engineering, focusing primarily on the planning, design, construction, maintenance, and management of underground utility systems.

IPO Statistic

The IPO entails a public issue of 124.9mn new ordinary shares and an offer for sale at an IPO price of RM0.24/share, which accounts for 26.7% of the group’s enlarged issued share capital.

Public issue:

• 30.4mn new shares for application by the Malaysian public,

• 40.6mn new shares for application by eligible parties,

• 38.6mn new shares for MITI,

• 15.3mn new shares for private placement to selected investors, and

• 37.5mn offer for sale of existing shares.

Main Competitive Advantages

1. Full-fledged Horizontal Directional Drilling (HDD) engineering solutions provider.

2. Robust industry demand; and

3. Strong client relationships.

Valuation

At an IPO price of RM0.24/share, UUE is priced at a trailing PER of 10.2x FY23 core EPS. We value the company at 9x CY25 EPS, arriving at a fair value of RM0.37/share. Not Rated.

Business Overview

UUE Holdings Bhd (UUE) is primarily engaged in providing comprehensive underground utilities engineering solutions. The company specialises in the Horizontal Directional Drilling (HDD) method for pipe installation, while also employing open cut and micro trenching excavation techniques. Furthermore, UUE manufactures and trades High-Density Polyethylene (HDPE) pipes, predominantly to support its underground utilities engineering projects in Malaysia and Singapore. In these markets, the company largely serves the electricity and telecommunications sectors, enhancing infrastructure reliability and efficiency.

Utilisation of Proceeds

The estimated gross proceeds of RM30.0mn raised are expected to be utilised for the following:

Key Competitive Advantages

1) Full-fledged HDD Engineering Solutions Provider

UUE stands out as a comprehensive HDD engineering solution provider, offering a full spectrum of services, including project planning and management, utility detection and mapping, and HDD technical expertise. Unlike competitors who specialise in isolated areas, UUE integrates these functions, eliminating the need for multiple engagements. The company employs subcontractors for physical tasks such as trenching, HDD works, cable laying, and related activities, ensuring quality and timely delivery. Key competitive advantages include meticulous project planning, precise cost assessments, and effective subcontractor oversight. UUE also conducts pre-project utility surveys to minimise the risks of damaging existing utilities, and invests in virtual reality HDDs and simulators for advanced employee training. This holistic approach enhances project delivery performance and ensures technical, time, and cost efficiency, solidifying UUE’s leadership in Malaysia and Singapore’s underground utilities engineering sector.

2) Robust Industry Demand

UUE is poised to capitalise on robust industry demand, leveraging its extensive experience and proven track record in the electricity supply sector. The company plans to expand regionally in Peninsular Malaysia, targeting Terengganu, Kelantan, and Pahang by securing telecommunications and electricity supply projects. Currently, UUE has secured electricity supply contracts worth RM83.9mn in these regions, establishing a strong presence and identifying further business opportunities. UUE owns a comprehensive fleet of HDD machinery and equipment, including 18 HDD machines, 2 backhoes, 1 excavator, 6 underground utility locators, and 4 gyroscopic utility mapping devices, which allows for cost control and operational flexibility in managing projects. As of the last reporting date (LPD), the company has an unbilled order book value of RM223.4mn, expected to be realised over the next three financial years.

The growing electricity demand, driven by urbanisation and substantial investments in utility infrastructure, further supports UUE’s growth prospects. The company stands to benefit from the robust capital expenditure outlook for Tenaga Nasional Berhad (TNB), aimed at supporting the National Energy Transition Roadmap. With TNB’s indicative annual CAPEX projected to be RM10-20bn up to 2050, there is a significant commitment to enhancing utility infrastructure, particularly through underground cabling. This investment is crucial for strengthening grid infrastructure, facilitating the transition to renewable energy, and minimising distribution bottlenecks, thereby providing a solid foundation for UUE’s sustained growth and profitability.

Meanwhile, UUE is set to benefit from Malaysia's significant investment in 5G infrastructure, driven by the Malaysia Digital Economy Blueprint (2021–2030). This plan aims to transform Malaysia into a high-income, technology-driven nation, which includes Digital Nasional Berhad's 5G rollout, starting in Kuala Lumpur, Putrajaya, and Cyberjaya by the end of 2021, with nationwide expansion by 2024. Additionally, the JENDELA action plan, part of the 12th Malaysia Plan, allocates RM21bn to enhance digital connectivity. The rising demand for connectivity services is expected to drive further investments in utility infrastructure. All in, UUE is well-positioned to capitalise on these investments, reinforcing its market position and supporting its growth prospects in Malaysia.

3) Strong Client Relationships.

UUE has long-standing client relationships with key stakeholders, including main contractors, property developers, and telecommunications providers, spanning over a decade with its top clients currently. Recognised for delivering tailored, high-quality underground utilities engineering solutions, UUE regularly receives requests for quotations from main contractors for various projects. Exclusive agreements with Komasi Engineering and Sutera Utama further solidify its market position, providing a stable project pipeline. Leveraging these partnerships, UUE successfully secures contracts from leading utility companies like Maxis Broadband Sdn Bhd. This collaborative approach extends to Singapore, where UUE taps into its network of main contractors to secure utility projects. By maintaining a roster of trusted subcontractors and suppliers, UUE ensures consistent service excellence and timely project completion. These enduring partnerships not only contribute to UUE's reputation but also generate new business opportunities through referrals and word-of-mouth. All in, UUE's strong client relationships serve as a cornerstone for sustained growth and market leadership in the underground utilities engineering sector.

Key Risks Relating to Business and Industry

1) Failure to Secure New Jobs May Affect Earnings Visibility.

2) High Dependence on Major Key Clients, and

3) Unforeseen Cost Overruns May Affect Profitability.

Financial Highlights

The group achieved a 2-year revenue CAGR of 31.0% to RM88.7mn from FY21 to FY23, largely driven by growing revenue recognition from the underground utilities engineering solutions division. This is underpinned by robust industry demand for underground utilities engineering solutions from the electricity and telecommunication sectors, thanks to the higher CAPEX earmarked for the replacement of the cabling and the upgrading of the underground infrastructure. In line with the revenue growth, its core earnings surged to RM14.3mn from RM7.6mn in 3 years. To note, FY23’s core earnings declined slightly to RM14.3mn (-5.3% YoY), owing to higher administrative expenses stemming from salary adjustments and new recruitment.

Future Plans and Business Strategies

The Group’s Future Plans and Business Strategies Are as Follows:

1) Purchase New Machinery to Broaden Service Ranges

UUE aims to bolster its underground utilities engineering capabilities by purchasing essential machinery. Currently relying on leased equipment like HDD machines, excavators, and lorries, UUE plans to invest approximately RM15.8mn from the IPO proceeds over the next 24 months to acquire these assets. Additionally, the company intends to expand its service offerings by purchasing a maxi rig HDD machine, enabling entry into subsea HDD works. To prepare for this expansion, UUE will train existing employees and recruit experienced personnel. Owning machinery enhances UUE's competitive position, reduces risk, and improves cost control. This strategic move not only enhances project capabilities but also increases efficiency, reliability, and technical proficiency, positioning UUE as a leading player in the underground utilities engineering sector.

2) Business Expansion Domestically and Regionally

UUE is poised for expansion domestically and regionally. In Malaysia, the company aims to strengthen its presence across Peninsular Malaysia, particularly in the east coast states, leveraging secured contracts worth RM83.9mn. Collaborations with reputable contractors will facilitate this growth. In Singapore, UUE anticipates increased demand for underground utilities engineering solutions due to population growth and infrastructure development. The company plans to capitalise on this by actively participating in tenders, leveraging its expertise and workforce. These expansion efforts align with UUE's growth strategy, positioning it for sustained leadership in the HDD-based underground utilities engineering sector across both Malaysia and Singapore.

Outlook

According to the independent market research report by Providence Strategic Partner, outlined in the IPO prospectus, several factors are expected to drive the group’s future expansion. Firstly, sustained economic growth and urbanisation resulting from population growth will spur investments in utility infrastructure, including new and replacement projects, particularly in response to increasing electricity demands. Moreover, Malaysia's government targets for renewable energy generation will open up investment avenues in power infrastructure, with an estimated capex of RM637bn aimed at enhancing the transmission and distribution grid to achieve a 70% renewable energy capacity mix by 2050 under the Renewable Energy Strategic Development Roadmap. Collectively, these factors are set to bolster demand for underground utilities engineering services in the energy sector across Malaysia.

Balance Sheet

On a pro forma basis, the group’s financial position is expected to improve from a net debt position of RM1.7mn (net gearing ratio of 0.11x) as of endFY23 to a net cash position of RM24.4mn post listing with the utilisation of fresh proceeds of RM30.0mn.

Dividend Policy

UUE does not have a formal dividend policy. However, we believe that a fair dividend payout assumption of 15% is justified, considering the steady earnings growth in the near future and positive operating cash flow.

Earnings Forecast

Going forward, we estimate the group to register core earnings growth of 34.1%, 15.2%, and 15.5% to RM19.2mn, RM22.1mn, and RM25.6mn for FY24 to FY26, respectively. This growth is mainly driven by the following assumptions:

• A total orderbook of RM223.4mn to be recognised in the next 3 financial years,
• A project replenishment target of c.RM100mn per year,
• New contribution from the subsea project post-acquisition of subsea HDD Machinery.

Valuation

At an IPO price of RM0.24/share, UUE is priced at a trailing PER of 10.2x FY23 core EPS. We ascribe a target PER of 9x CY25 EPS and arrive at a fair value of RM0.37/share. We believe the assigned PE multiple is fair and reasonable, given its smaller market capitalisation and relatively lower earnings growth compared to its listed peer. Not Rated.

Source: TA Research - 14 Jun 2024