UUE: Earnings Beat Expectations on Cost Efficiencies, Target Price Raised

An investment bank has initiated coverage on a key player in the underground utilities sector, assigning a “Buy” rating and a target price of RM0.25, representing a 25.0% upside from its last traded price of RM0.20. The positive outlook is underpinned by the company’s strong financial performance, strategic market positioning, and robust growth prospects, despite some anticipated margin normalisation.

Performance Review

The company has demonstrated impressive financial health, recording a robust 5-year compound annual growth rate (CAGR) of 27% in revenue and 26% in core net profit from FY2021 to FY2025. This performance is primarily driven by disciplined cost management and significant operational leverage. While gross profit margins (GPMs) saw a moderation to 27.6% in FY2025 from a previous range of 28.2%-30.0% (FY2021-2024), attributed partly to a lower proportion of Singapore-derived revenue, the overall earnings trajectory remains strong. Analysts forecast a further moderation in GPMs for FY2026-2028, reflecting more conservative assumptions for larger and increasingly complex projects in Singapore.

Strategic Advantages and Growth Drivers

A key driver of the company’s success is its formidable outstanding order book, valued at MYR522 million, with approximately 66% linked to Tenaga Nasional (TNB) projects. This extensive order book anchors earnings visibility and positions the firm to capitalise on the substantial capital expenditure (capex) upcycles by both TNB and SP PowerAssets. TNB’s Regulatory Period 4 (RP4) has seen allowed capex double to MYR42.8 billion, fueled by rising electricity demand, ensuring stable, recurring, and highly visible demand for the company’s specialised services in horizontal directional drilling (HDD). Similarly, SP PowerAssets’ capex reaching SGD1.16 billion in FY2025 has led to an increase in tender activity and larger contract awards, with a recent SGD20.9 million win highlighting stronger integration into main contractors’ planning stages.

The company’s strategic model includes exclusive partnership agreements with main contractors in Malaysia and Singapore, ensuring a steady flow of high-value HDD work. Post-IPO fleet expansion, including additional HDD machines and excavators, enhances operational efficiency, cost control, and project execution capabilities. Furthermore, a strategic venture into subsea HDD with the acquisition of a Maxi Rig HDD unit and a Memorandum of Understanding (MoU) with ASEAN Cableship present significant regional expansion opportunities within the growing submarine cable ecosystem. The firm is also diversifying into solar PV systems, with a MYR30 million tender book, which is seen as timely and complementary to its existing engineering expertise, poised to unlock new revenue streams.

Future Outlook and Challenges

Looking ahead, analysts project a 3-year earnings CAGR of 30.6% from FY2025 to FY2028, with core earnings expected to nearly double from MYR23.9 million to MYR53.2 million. The strongest growth is anticipated in FY2027, largely propelled by existing orders. However, the report acknowledges potential challenges, including a transitional year for Singapore contributions in FY2026 due to anticipated weaker performance, and various downside risks such as failure to secure new contracts, delays in permit approvals, and higher-than-estimated raw material costs. Despite these headwinds, the investment bank maintains its positive stance, citing the company’s strong fundamentals and clear growth trajectory in critical infrastructure development.