UEC, quality, growth -besides defensive to the current enviroment.

UEC is high quality & growth -besides a defensive pick in the current tough enviroment.

Unimit Engineering PCL, UEC (2.14)  is a company I wrote up a couple of years ago and shortly after that it had a fabulous run almost tripling in price in the following year.  Since then it has reduced its PAR value from 1 Baht to 0.25 Baht per share, effectively a 4 for one stock split.  On the old par basis the stock ran from around 12.7 (where I first wrote it up with “a strong buy” view) to nearly 40 as I recall, only to now be back down to around 8.60. Divided by four, to adjust for the PAR change, comes to around 2.16 where it closed the year 2008.  At that price it surely deserves another strong buy view, as I review below.

You can see my original article on UEC, at this link:  /index.php?module=Pagesetter&func=viewpub&tid=1&pid=756&title=After_the_company_visit_a_change_of_opinion&newlang=eng

You can see some of UEC’s projects/references of the past:

http://www.unimit.com/reference/reference.html

You can see UEC’s very well done web site at:  http://www.unimit.com

You can see UEC’s MAI basis information here:  http://www.mai.or.th/mai/callIRPage.do?symbol=UEC&mode=frame&language=en

The thing with UEC is that I advocated taking profits premature on the way up, then started viewing it favorably again too early last year, as its market price only kept dropping furhter, mostly during the second half of 2008.  Yet, before and after this price roller coaster, UEC remains a formidable firm which should be included in all long term investors’ portfolio’s, in my view.  Currently is your chance to pick them up, or price average down, as this stock is oversold.

UEC’s price drop was in primarily due to the US portfolio/fund investors bailing all-out, on their self inflicted subprime horror financial crisis which ended-up mandating they divest out of countries like Thailand, only secondarily due to a profit shortfall in the second half which I explain further below.

Yet before and after UEC remains a great company with very strong investor relations (IR) and very strong/excellent corporate governance (as compared to LVT for example which is just now lacking on both) and still high growth prospects in an otherwise uncertain global enviroment.

With UEC now trading around its stated book value, yielding almost 14% on the current stock price, I view this stock rather grossly undervalued. UEC just paid 0.30 Baht per year in dividends, 0.10 as an interim dividend which was dispersed already -and 0.20 as the year end-upcoming dividend- this diviend amount is what I much expect so for the foreseeable future during the more difficult economic times of say years’09 and ‘10.  Beyond this, I see their dividend rising faster then the MAI or SET averages due to UEC being the high quality leader in a true growth industry.

I perceive UEC earning 0.50 per share in 2008, a bit more in ‘09, and this then rising to 0.55 per share in ‘10.  (For the first 9 months ’08, they earned 0.36 Baht per share).  Again I am prudent here due to the global economic contraction in force now. Currently trading around a p/e of 4.2, I today wish to here re-affirm my table pounding strong buy view.  The question is: how cheap does a quality leading company have to get before one gets excited? 

With the sharp drop in oil price and sluggish global economy, PTT group no doubt plans to review its investment plans. The just now cloudier outlook for the energy and petrochemical industries poses some minor downside risk to UEC’s revenue growth in the foreseeable future as a majority of the company’s total revenue has been based on these industries.  However their backlog at year end ’08, remains at a solid 1.1 Bill Baht and after speaking to the President, its unlikely major investment projects will get shelved. I also do not subscribe to oil prices staying this low for too long.  Thai freckle investor sentiment of late has been to view UEC stock price movements as similar to PTT’s and so both shares seem to move together, hence if the SET corrects along with big cap PTT, so will UEC. This is what Mr. Market thinks of now. 

Still my take is that a company which has an average ROE of over 20% for some years, a nice double digit dividend yield -and is the premier/leader firm in its industry –along with excellent corporate governance, deserves some of your long term investor capital.  UEC deserves at least the same p/e as the average MAI stock, just now around 6-7.  I just don’t understand some local broker reports which are schizophrenic about all this. 

UEC was in December of 2007 named Hong Kong’s “ASIAMONEY” as “Thailand’s Small–Cap Corporate” of the Year.  And just 2 months before, in October 2007, UEC was named “Best under a Billion”, by Forbes Asia. (I.e. under 1 Bill. US$ in annual revenue).

I re-affirm this view after a solid most interesting quality visit a couple of weeks ago with Mr. Thailuck Leetavorn, UEC’s President.  In this report here today, I give a summary of this excellent visit further below. First some quotes from their latest annual report:

“Unimit’s business is almost entirely supported by the energy and oil & gas, petrochemicals, chemicals and water industries and by the power generation ands water systems sectors, including the growth field of water desalination.”

“The end use applications, especially for pressure vessels to store gases such as LPG, ammonia carbon dioxide, etc, dictate stringent international standards in teh manufacturing and the quality of these products, most notably the ASME stamps. Because of this tight standard which requires experience and technical expertise, and because of the capital intensive nature of Unimit’s business, barrier to entry is relatively high. Therefore, Unimit can expect to continue to capitalize on the current favorable market condition…UNIMIT remains a debt free company and with a very strong cash flow position.”

“With the completion of this second factory and the additional production capacity, especially for pressure vessels, UNIMIT is now well positioned to further expand our global reach which, up to now, has been held back by lack of production capacity.”

From UEC’s 2007 annual report.

The Thai government for long supports the use of Liquefied Petroleum Gas LPG and this fosters strong demand now and into the future for large gas storage tanks.  Reading some books on energy has made me understand that LPG is a huge future and now fairly attractive & cleaner energy source which is part of the solution not part of the dirty and running out oil problem.  Asia in general is well ahead on this global energy source (with Koera & Japan leading) and the US well behind, due to the “great but not in my back yard” hang-up.  A LPG receiver terminal is expected to be completed by year 2010 (by PTT).

“UEC can make critical parts for power plants, water purification and desalination and special metals like titanium.  The company has 1500 workers, among which 250 are engineers (design, mechanical engineers etc..speciality).”  Mr. Thailuck Leetavorn, UEC’s President

In mid 2008 UEC’s profit margin came under some pressure as their second factory was not yet on stream yet (but now is) resulting in the company having to temporarily use some sub contractors to finish part of the jobs on hand.  Along with high steel prices, this created some passing reduced profit margins.  This second factory will allow UEC  start offering high pressure vessels of up to 125 mm (5 inch) thickness to compliment its existing  pressure vessels products.  The company has now also operations in Rayong or the Thai industrial shipping center and so transporting huge pressure tanks will be less of a logistical nightmare. This along with its second factory now completed, will allow UEC double or more its existing capacity.

Giant PTT and Siam Cement are currently UEC’s biggest clients, making up some 60% of the companies revenues for now (PTT 40% and SCC 20%), but as the President told me “there are plenty of other local jobs to be had if UEC wants”.  While some may view this as a bit risky and undiversified, I view this as probably safer -as year 2009 will be a year were collecting money for jobs done will the critical success component in the expected tough environment this year.  As SCC and PTT are 2 of Thailand’s largest industrial companies -and so surely UEC will get paid.  As of currently, 30% of UEC revenues come from exports. UEC could produce parts for the Thai Nuclear Industry, if this ever takes off here.  Specialty metals like titanium, water desalination and other future growth/green industries are at its doorsteps.

“The jobs are there... the biggest challenge is to control and project correctly our costs when securing/quoting these.” K. Thailuck tells me with a smile. 

UEC has no long term debt to speak of, nevertheless it foresaw the global credit crunch coming -and so firmly secured some months ago a 700 mill. Baht long term loan commitment from KTB bank (5 years running); guaranteed available should they need to draw on this in the future.  The bank tried unsuccessfully to convince UEC on accepting a shorter time term commitment.

With guidance I see UEC earning around 0.50 for 2008, a touch more this year and if the world and Thai economies’ recover a bit this year, then over 0.60 in year 2010. Execution and pricing the jobs correctly are the challenges, not the business per say, as there are plenty of jobs out there to be bid on, before and after the current slowdown. ***

UEC is potentially sitting on niches of very strong new growth besides green industries of the future.

Liquid Gold  Rising population are bumping up against a shrinking supply of fresh clean water.  In many areas of the world the ground water is running out and/or is poisonous polluted by humans and industrial waster.

Water desalination is already a huge green industry with vast more potential.

Water is not really the issue, fresh clean water is. Consider as just one example that China’s meat demand is doubling every 10 years and poultry consumption in India doubled in the first half of this decade…as the world population grows 10% by year 2020 (according the UN), beef, poultry and chicken will grow by 25% during this same time.  The average American eats 56 pounds of such meats a year, while the average Chinese/Indian currently eat only ¼ as much. This trend alone will require a huge amount of fresh water, much of it will come from desalination water plants, here UEC could become an important contributor in the future.  As the cost of clean water goes-up, or dries-up, desalination is more and more the only real option.

According to the International Desalination Association, 13,080 desalination plants produce more than 12 billion gallons of fresh water a day worldwide. Most are in the Middle East, where energy is cheap and water scarce.  Saudi Arabia alone intends to spend some $40 bill. in the coming two decades on such water projects.  Israel and Singapore have large  desalination plants, as well as Australia which is building a bunch of them after the recent severe drought-scare there.  The Perth plant is powered partially by energy from a nearby wind farm, while the Sydney plant will be powered entirely by renewable sources.  When powered this way, desalination plants are hugely popular with voters. 

There are some potentially radical breakthroughs coming in desalination. Nanotube Membranes and Nanocomposite Membranes are two examples I read about.  Both are very promising and use up to 50-75% less energy then conventional methods, combined with the world running out of fresh water (not just oil) such energy cost savings could propel water desalination as being a/the huge growth industry as is it now already -and more so in the future, because Sea water like Sun is just about free besides virtually  unlimited.

So the arrival of more cost effective desalination, along with water shortages and population growth, will set off a decades-long boom in this industry* and UEC can be part of it.  I will ask Mr. Thailuck Leetavorn, for further information on their planned participation in this high growth industry which was only mentioned in passing when we met, as I had not researched the above yet.

Best Regards,

Paul A. Renaud.

www.thaistocks.com

Some further Notes:

Looking up “water desalination, I see there are many world wide events on this, including one coming up in Bangkok.

·         February 23–24 2009, Bangkok, Thailand
February 26–27 2009, Singapore
International Training Program on Desalination Technology
Organized by TechnoBiz Communications LP
Instructor Nikolay Voutchkov
Program: Desalination Technologies and Applications: Introduction to desalination; Reverse osmosis; Planning for seawater desalination plant; Desalination Systems – Design, Operation and Costs: Reverse osmosis system; Desalination plant energy use and costs; Desalination plant operational monitoring and troubleshooting; Desalination plant case studies
Contact: Ms. Siriporn, Training Coordinator, TechnoBiz Communications LP, 300/53, Soi Lardprao 35/1, Lardprao Road, Chandrakasem, Chatuchak, Bangkok 10900 Thailand
Tel. +66 2 938 2315; Mobile +66 84 658 144; Fax +66 2 513 1301; email: training@technobiz-asia.com; www.technobiz-asia.com

Here is an old huge warship the “John F. Kennedy” which is proposed to be turned into a “water desalination,  http://www.thaindian.com/newsportal/sci-tech/inactive-warships-as-desalination-plants-to-provide-fresh-water_100102271.html

* Data and information on water desalination come from the excellent book  “Clean Money, Picking Winners in the Green-Tech Boom” 2009,  by John Rubino.  I agree with the author that these new green industries, and the understanding of them better, are huge new growth industries with select vast investment potential.  Demco with its new wind power project, SPPT with waste into oil -and UEC with participation in water desalination are my three Thai stock picks in that, for 2009 and beyond.