Unimesh ... Oct2011

Unimech Group Berhad  - By ZJ Research.

2QFY11 Results Review
• Unimech Group Berhad (Unimech) produced another set of consistent results with 2QFY11 net profit coming in at RM5.4 mln, taking 1HFY11 net profit to RM9.5 mln. The results were within our expectations with 1HFY11 profit reaching 53% of our full year projection.

• Unimech’s 1HFY11 turnover and net profit increased 33.8% and 20.0% y-o-y to RM96.7 mln and RM9.5 mln respectively, mainly on higher demand for its valves, fittings and related products. The industrial valves and related products division remains the largest business segment, contributing 79% to Group revenue and and 89% to operating profit in 1HFY11. To recap, Unimech’s other key businesses include heat and steam engineering systems; manufacture of electronic products and electronic automation control systems; as well as
design, fabrication and assembly of pumps.

• Sequentially, 2QFY11 revenue declined a modest 4.3% on lower contribution from the industrial valves and related products division. However, despite the lower turnover, net profit surged 35.6% to RM5.4 mln, due to higher gross profit margin achieved during the quarter under review. The improved performance in 2QFY11 made up for the lower margin experienced in 1QYF11, and as a result, Unimech’s 1HFY11 operating profit margin was sustained at 16.8%, which is comparable to the 17% margin achieved a year ago.

• Meanwhile, Unimech’s operations also remain firmly supported by a solid balance sheet with a low net gearing of 0.26x and a NTA/share of RM1.22 as at end-June 2011.

• With 1HFY11 results in line with our expectations, we continue to maintain our current FY11 revenue and net profit estimates of RM182.1 mln and RM17.9 mln respectively.

• No dividend was declared for the quarter under review.

Recommendation
We maintain a Buy recommendation on Unimech, but lower our fair value to RM1.05 (from RM1.18).

Our fair value is derived from ascribing a PER of 8x (from 9x) against our FY11 net profit projection.
The reduced benchmark PER is in tandem with the lower average PER of small-cap companies in the
industrial products segment, following the recent sell down in the broader equity market.

We continue to like Unimech for its earnings growth prospects, underpinned by the steady rise in the
demand for its industrial valves and related products. Its consistency in earnings delivery is also
another plus point for the Group.

We view the recent fall in Unimech’s share price as a reflection of the uncertain macroeconomic
environment and poor investor sentiment, as the Group’s fundamentals remain intact and backed by
solid a balance sheet. Valuation, at prospective FY11 PER of 6x and P/BV of 0.6x, remains
undemanding, in addition to the attractive potential net dividend yield of approximately 5%.