UMC: Earnings Fall Below Expectations on Margin Pressure, ‘BUY’ Rating Reaffirmed with Revised Target

PhillipCapital’s latest research report indicates that the company’s core net profit for the first six months of fiscal year 2026 (6MFY26) amounted to RM3.8 million, representing a modest 1% year-on-year increase. This performance, however, fell short of both PhillipCapital’s and market consensus expectations, accounting for 40% and 44% of the full-year forecasts respectively. Despite a 12% year-on-year surge in 6MFY26 revenue to RM27.6 million, driven by robust contributions from its manufacturing and distribution segments, profit deviation was primarily attributed to lower-than-expected margins.

Performance Review

During 2QFY26, the company experienced a 5% quarter-on-quarter revenue decline, mainly due to weaker contributions from the distribution segment, which saw a 17% QoQ decrease. This softness was partially offset by a strong 26% QoQ increase in the manufacturing segment. The weaker distribution performance was linked to reduced public hospital orders, typically experiencing a pause during November’s seasonal budget cycles. Despite the revenue dip, the company’s EBITDA margin saw a significant improvement of 7 percentage points QoQ, reaching 27.4%, supported by a better product mix. Additionally, a lower effective tax rate of 7.5% was recorded, benefiting from tax incentives and non-taxable grant amortisation.

Future Outlook and Analyst Recommendation

Looking ahead, the company’s long-term growth prospects are bolstered by several strategic initiatives. These include a newly leased 3.1-acre site at Batu Kawan Industrial Park, providing ample room for capacity expansion and potential diversification into new medical and life sciences products. The manufacturing segment is expected to continue its growth trajectory, supported by capacity doubling and robust global demand, complemented by a healthy pipeline of new product introductions. Despite these positive indicators, PhillipCapital has revised its FY26-28E EPS forecasts downwards by 14-17%, incorporating more conservative margin assumptions and a less favourable product mix. Consequently, the target price has been adjusted to RM0.43 from the previous RM0.51, based on an unchanged target 17x PER.

PhillipCapital reiterates its ‘BUY’ rating, noting that current valuations appear undemanding, with the stock trading at a significant discount below its three-year mean. Key downside risks to this optimistic outlook include a potential slowdown in demand for medical equipment, operational disruptions, and license losses.