After the company visit, a change of opinion.

PaulRen's picture
Company Visit

Today am changing my shorter term opinion on UKEM (2.24) and alternatively want members to consider UEC (12.70) instead, which I would rate today with a strong buy view.

This company is on an earnings momentum trajectory and will show better EPS growth in the near future then UKEM. (See my summary findings below). After my in person 1 1/2 hour visit with UKEM management I found out the following 2 key things, just to summarize here.

UKEM will report a 4Q '06 loss of around 5-7 million Baht due to "restructuring of one of their key warehouses". While this is a one time event it will/might create uncertainty when this is reported in the next couple of months. However on this coming "bad" news, I would get UKEM back as the balance of the year should be strong with EPS probably around 0.35 for 2007.

As such the expected p/e for year 2007 should still be a low 6.3. It is difficult to know if the market will sell off UKEM shares on this bad last quarter news or, if alternatively, there will be a speculative run in the stock before then? I realize that currently UKEM shares trade more liquid then UEC but as a medium term value investor whom is growth an dividend obsessed, I chose to weigh this more and as stated, am not sure all UKEM holders realize that the 4 Q earnings will be negative.

Again, a value investor which growth and dividend geared I prefer UEC better just now. I also much believe the near term dividend prospects are better for UEC, as UKEM already paid out more then half its expected 2006 year in cash dividends. Hence expect better yield on UEC in the near term. The other thing to watch for are global oil prices. UKEM stated to me that lower oil prices will start denting into profits due to inventory which was priced when petroleum was trading at higher then current market prices.

While Oil currently around 52 is probably not a big deal, but should the price drop further it will start hurting. I am not too keen on UKEM in the short term taking an earnings penalty, as global Oil prices are in a corrective mood.

UEC and DEMCO are now my two newer choices I much favor going into this year due to expected strong earnings growth, high dividends, low p/e and desirable industry, especially post the unexpected events of the last few weeks. I expect to visit both of these companies in early February. I was not able to visit Demco last week as the company was being audited -but they indicated they would see me in early February.

Here are my summary findings on UEC. Unimit Engineering Public Company Limited UEC (12.70) UEC started trading on the Market for Alternative Investment (Mai) with the trading symbol "UEC" on 25 November 2005 at 8.10 Baht per share. The company was established on April 21, 1982 and so is almost 25 years old. The stock peaked around 14.8 a couple of months ago and sold off to as low as 11.80 on the 2 SET panic days, of recent.

Currently around 12.60 I rate UEC a strong buy due to well above average earnings growth potential. Purpose to use the initial IPO proceeds: - Invest in new machines and equipments for existing plant - Purchase land for plant expansion - Build new plant facilities and purchase machines and equipments to expand steel structure capacity, and focus on manufacture heat exchanger and high pressure vessel products Type of Business and Nature of Operation: UEC is a made-to-order manufacturer of equipments used in the manufacturing process of company mainly in the buoyant energy and petrochemical sectors.

This Company's products can be divided into 5 main categories: 1. Pressure Vessel: Container for chemical substance with the special design to endure high pressure incurred during manufacturing process. Chemical substances to be contained in pressure vessel are normally in gaseous or liquid form, such as liquefied petroleum gas, ammonia, carbon dioxide, nitrogen and etc. 2. Machinery Parts: Machinery parts tailor-made according to customers order such as part of air pre-heater, part of incinerator, stack and fan casing. 3. Steel Structure: Steel structure for petrochemical plants such as plant structure, and steel structure on the oil drilling vessel. 4. Chemical Tank: General chemical tank such as oil tank and plastic resin silo which are not designed to endure high pressure during manufacturing process. 5. Mechanical Installation Company also provides machine and equipment installation service such as setting up pipe system in petrochemical plant.

For the 3 Quarter UEC reported a nice jump (nearly doubling) to 0.74 from 0.39 and for the first 9 months the EPS grew from 1.18 for year 2005 to 1.41 for this year, ending 30 September of 2006. On November 10, 2006 the board approved an interim dividend payment for the year 2006 , at the rate 0.50 per share. This is an interim dividend. Impressive Future Projects: UEC has future projects to generate revenues for continuous earning growth. The future projects are summarized below, as reported to the SET: 1. Improvement of machine and equipments project: to improve production efficiency and reduce manufacturing overhead cost for existing plant.

This project requires investment of around Baht 50 Million for purchasing new machines and equipments which will be implemented in the first quarter of 2006 and expected to be completed by the second quarter of 2006. 2. Expansion of plant facilities: to expand the plant areas for increase capacity to support the increasing number of customers. The company plans to buy new 110 rai plot of land in the first quarter of 2006.

The total cost of land and improvement areas (excluding plant building) is around Baht 110 million. 3. Expand steel structure and heat exchanger project. The company plans to build new plant on the new land in article 2 and buy machines and equipments, with investment cost of around Baht 84 million, started in the second quarter of 2006 and expected to be completed by the late of the forth quarter of 2006.

Although, the expansion facilities can be utilized to manufacture all product categories, the company will utilize the plant to focus on Steel structure and Heat Exchanger. 4. Expand high pressure vessel project: This is the new product of the company which currently can not be manufactured in Thailand. The company plans to build plant on the new plot of land (as stated in 2) and buy machines and equipments.

The investment cost is around Baht 120 million. This project will be implemented in the second quarter of 2007 and expected to be completed by late of the forth quarter of 2007. Currently, the company can produce pressure vessel which has capability to endure maximum pressure of 100 bars in the manufacturing process. "Previously, the company has received orders from many customers to produce pressure vessel which could endure pressure from 100 to 400 bars. However, due to the limitation of the company's machine capacity, the company has to reject the projects." UEC, as reported to the SET.

Currently, due to the excess demand of petrochemical products, it is expected that companies in petrochemical sectors will continue to expand its production capacity from 2005 to 2009. UEC's ROA was reported at 26.87% for last year, and 19.84%, for the previous year. UEC's ROE was reported at 29% for last year, and 17.11%, for the previous year. One thing which is a bit different then other smaller cap's recently favored is that UEC senior management does not own a large chunk of the stock. Ownership is around 5-6% per senior manager, as you can see from looking at the major shareholders.

See the SET link: here On the other hand a major foreign shareholder is MR.VIET HUNG DO, this is a shrewed large investor whom I have met in the past and respect. See this link: Interest expense is very minimal and so this company has very low debt.

Conclusion: My take is that UEC (12.70) is in a very desirable industry as there is much room for growth in this sector "of shop fabrication and field construction for major Petrochemical Plants and Oil Refineries", regardless of present politics and/or mild economic slowdown. UEC is on a high earnings growth and expansion track, with minimum amount of debt and a respectable dividend yield, estimated to be above 6.5%. The company has solid and above average profitability and net profit margin ratio's. While the stock is a bit illiquid just now, my sense is to own UEC for medium term investment and so I would rate it a strong buy, in my opinion.

Best Regards,

Paul A. Renaud.