Overview
Univision Engineering Ltd (UVEL) is a Hong Kong-headquartered provider of CCTV Surveillance System in Hong Kong. The company is established in the field of industrial CCTV and is increasingly expanding the business in the entire integration of security systems, and major surveillance products which Univision provides are Smart Card readers & System components, IBS Integrated Building Systems, CCTV System Controllers and equipment, DVR and Integrated Toll Surveillance System. The group was incorporated in Hong Kong on 23 November 1979 and is known for its technical integrity and expertise in maintenance services, installation, planning, system design and engineering consultancy. The company is extremely competitive and has a successful tendering rate of 70 per cent, and it holds various distributorship with well-known CCTV manufacturers in USA, Europe and Japan.

Utilizing local and imported components, the workshop of the company is fully equipped to modify and to assemble CCTV system, and its cost structure of the company is significantly lower than that of its competitors as much of the major components used in CCTV systems and DVR are manufactured or assembled by the company. In 1996 the company was granted the license by Phillip-Mikron for the production and marketing of Mifare® Core Module (MCM), and also has a verbal agreement with Sony Solid State Image Sensors Division, as an accredited importer of their CCD sensors. The CCTV products manufactured by the group include mounting brackets, indoor camera enclosures, digital video recorder, fibre optic transmitter, on-screen camera I.D. generators, video matrix, and video distribution amplifiers.

Key Statistics



Management

Stephen Sin Mo KOO is the Executive Chairman of the group and was appointed as a Director in March 2003. Chun Pan WONG holds the position of Chief Executive Officer and was appointed as a Director in March 1992. The position of Finance Director is held by Danny Kwok Fai YIP, who was appointed in September 2007.

Top Shareholders

                   
(Source: Thomson Reuters)

Contract with Mass Transit Railway

The company in May 2017 announced that it was awarded a contract valued at HK$389.4 million (£38.1 million) from MTR Corporation (MTRC), which will be provided with a more sophisticated system after it decided to upgrade their existing system. The MTRC Contract is expected to be completed by November 2023, and using a new Internet Protocol-based, digital CCTV system, the company will be responsible for replacing the Closed-Circuit Television (CCTV) systems for numerous MTRC railway lines. Leaving a further order book of HK$317.3 million to be billed over the next four and half years, the company has invoiced a total of approximately HK$90 million up to the financial year ended 31 March 2019, and with subsequent add-ons amounting to HK$17.9 million, the total value of the MTRC Contract now equals to HK$407.3 million

Financial Highlights (FY 2019, in £m)

During the financial year ended 31 March 2019, as contributions of construction contracts increased by 206% as compared with last year to £12.63 million, revenue surged by 154% to £14.2 million in the reporting period (FY 2018: £5.6 million). The increment in construction contracts was contributed by Central Wanchai Bypass Project, Hong Kong-Zhuhai-Macao Bridge Project, Liangtang Traffic Control and Surveillance System, while the majority of this significant increase came from the MTRC Replacement of CCTV Systems. Due to the wider scope in the services provided in the three-year maintenance contract with MTRC, the contribution from maintenance contracts were up by 10%, compared to the year before to £1.42 million. Gross profit increased by 76% to £3.2 million in the reporting period (FY 2018: £1.8 million) even as the cost of revenue rose from £3.77 million in the prior year to £11.01 million during the current period. However, due to additional engineers working directly on construction contracts, increase in the costs relating to subcontracting charges and more work on lower margin construction contracts, the gross margin of 22.5% was lower than that of last reporting period (FY 2018: 32.5%). As the number of staff has increased from 56 to 67 during the reporting period, administrative expenses increased by 31.4% to £1.3 million (FY 2018: £0.98 million), which was the major driver behind the increase in operating expenses. However, profit before tax rose considerably by 135% to £1.73 million during the financial year 2019 (FY 2018: £0.73 million), helped by higher gross profit and better control of operating expenses. Compared to £0.74 million for the last financial year, the profit attributable to the shareholders of the group also increased by 135% to £1.73 million as the company utilised previous tax loss to offset the taxable profit for the year. Reflecting a positive impact of £0.46 million from exchange differences on translation, total comprehensive income for the year was reported at £2.19 million, against a loss of £0.04 million recorded in the previous year. Basic earnings per share rose by 137% to 0.45p (FY 2018: 0.19p), reflecting the surge in profit attributable to shareholders. Total equity attributable to shareholders increased by £2.04 million to £7.92 million as at 31 March 2019 (as at 31 March 2018: £5.88 million), while cash and cash equivalents stood at £1.75 million as at 31 March 2019 (FY 2018: £0.97 million), which represented an increase of £0.78 million. Due to more efficient use of banking facilities and closer monitoring and effective control of working capital, the company generated positive cash flow from operations of £0.81 million in the reporting period (FY 2018: negative £0.36 million). The group proposed an increase of 28% in the final dividend to 0.55 HK cents (FY 2018: 0.43 HK cents).

Financial Ratios

                                                      
(Source: Thomson Reuters)

The company tracks various ratios to assess the business operations. Current Ratio, which shows the liquidity position of the group, was at 2.4x in the latest financial year, against 1.8x in FY 2018. Quick Ratio, which also shows the strength of liquidity position, was at 2.2x, against 1.6x in FY 2018. Average Collection Period declined from 37 days in FY 2018 to 20 days in FY 2019, suggesting more efficient collection by the group. Inventory Turnover, which shows how many times inventory has been sold and replaced during a given period, and measures how well a company generates sales from its inventory, rose significantly to 17.2 from 3.9 in FY 2018. While Gross Profit Margin declinedto 23%, Return on Invested Capital rose to 22% from 12% in FY 2018.

Valuation Methodology
Method 1:EV/Sales Multiple Approach (NTM)
 


To compare UVEL with its peers, EV/Sales multiple has been used. The peers are NanoFocus AG(NTM EV/Sales was 0.38), Redflex Holdings Ltd(NTM EV/Sales was 0.51), Image Systems AB(NTM EV/Sales was 0.71),Gunnebo AB(NTM EV/Sales was 0.73),and Net Insight AB(NTM EV/Sales was 0.91). The median of EV/Sales (NTM) of the company’s peers was 0.71x (approx.).

Method 2: EV/EBITDA Multiple Approach (NTM)



To compare UVEL with its peers, EV/EBITDA multiple has been used. The peers are Redflex Holdings Ltd(NTM EV/EBITDA was 3.59),Image Scan Holdings PLC(NTM EV/EBITDA was 4.68),EchoStar Corp(NTM EV/EBITDA was 5.79), Image Systems AB(NTM EV/EBITDA was 6.89), and Vianet Group PLC(NTM EV/EBITDA was 7.31). The mean of EV/EBITDA (NTM) of the company’s peers was 5.65x (approx.).

Share Price Commentary


Daily Chart as at 15-October-19, before the market closed (Source: Thomson Reuters)

On 15 October 2019, at the time of writing (before the market closed, at 10:12 am GMT), UVEL shares were trading at GBX 1.90 and remained flat against the previous day closing price. Stock's 52 weeks High and Low are GBX 2.99/GBX 1.51. The company's stock beta was 2.21, reflecting more volatility as compared to the benchmark index. The outstanding market capitalisation was around £7.29 million.

Growth Prospects and Risks Assessment

The company expects the increasing demand for networking and wireless infrastructure (such as IP-based digital technologies, 4G and 5G) to be the key growth driver for the market, which would fuel the growth of the video surveillance market as companies and government seek to enhance safety and security across different industries. The addressable market segment of the company is anticipated to undergo a healthy growth period, and a market research report estimates global video surveillance system market would reach a value of $95.98 billion by 2024, with the commercial sector expected to show the largest market share during the forecast period. However, with 84% of the total revenue, MTRC was the largest customer this financial year for the company, highlighting the need for diversifying the customer base and grow the business. The company is also currently operating close to full capacity, which might limit the number of tenders the group can file for. While the recent pro-democracy protests and clashes in Hong Kong has impacted the general business environment, the company expects it to provide business opportunities, as work orders for replacement of damaged CCTV equipment caused by vandalism are likely to come and authorities are expected to upgrade the video surveillance system.

Conclusion

In the last four years, the company has reported an impressive growth. Revenue rose at a CAGR of around 40.2%, while gross profit was up at a CAGR of 31.5%. Net income before tax rose at a CAGR of 175.57% and net income grew by 131.73%. Further improvement is expected by the company from the MTRC project.
Based on decent prospects, and supported by valuation undertaken using the above two methods, we have given a “SPECULATIVE BUY” recommendation at the closing  price of GBX 1.90 (as on 14th October 2019) with lower double-digit upside potential based on 0.71x NTM EV/Sales (approx.) on FY19 sales (approx.) and 5.65x NTM EV/EBITDA (approx.) on FY19 EBITDA (approx.).
 
*The “Speculative Buy” recommendation is valid for the current price as covered in the report (as on 15-October-19).
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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