ULICORP’s FY23 results missed our forecast on weak deliveries in 4Q. Its FY23 core net profit grew 9% driven by lower input cost. Its near-term earnings prospects remain strong on the back of a booming construction market. We cut our FY24F net profit forecast by 12%, reduce our TP by 12% to RM1.91 (from RM2.18) but maintain our OUTPERFORM call.

Its FY23 core net profit of RM40m missed our forecast by 13%. The variance against our forecast came largely from weaker-than-expected deliveries in 4Q. Consensus estimate is unavailable as we are the only research house covering the stock in the market.

YoY, its FY23 revenue was flattish as a higher contribution from its electric lighting and fittings segment (+17%), was partially offset by a weaker showing from its cable support system segment (-1%).

However, its net profit rose 9% as the carrying cost of its flat steel inventory normalised, having depleted the high-cost batches.

QoQ, its 4QFY23 core net profit fell 14% on a 4% decline in its top line due to: (i) a lower sales volume from its cable support system unit (- 6%), and (ii) higher administrative costs as well as selling and distribution expenses.

Forecasts. We cut our FY24F net profit by 12% to reflect a lower sales volume for its cable support systems while introducing our FY25F numbers.

Valuations. Consequently, we cut our TP by 12% to RM1.91 (from RM2.18) based on 8x FY24F PER - in line with the average historical forward PER of the steel product sector. There is no adjustment to our TP based on ESG given a 3-star ESG rating as appraised by us (see Page 4).

Outlook. ULICORP’s earnings prospects are strong, driven by overwhelming demand for its cable support systems on the back of a construction boom in both the private space (data centres, warehouses, hospital projects, etc) as well as impending public mega projects (on- going and impending such as the East East Rail Link, Johor Bahru- Singapore Rapid Transit System, Bayan Lepas LRT and MRT3). The consolidation in the local cable support system market during the pandemic era (i.e. weak players shutting down permanently) has also led to reduced competition which augurs well for market leader ULICORP.

Investment thesis. We like ULICORP for: (i) it being a re-opening play given the recovery in demand for its cable support system products widely used in buildings and infrastructures, (ii) its dominant market position with a market share of over 50% in the local cable support systems space, and (iii) its net cash position of RM99m that translates to a strong war chest or allowing it to pay attractive dividends. Maintain OUTPERFORM.

Risks to our call include: (i) volatility in the cost of input CRC, (ii) a slowdown in the global economy including the transportation and manufacturing sectors, hurting the demand for cable support systems, and (iii) intensifying competition from low-cost producers in the region.

Source: Kenanga Research - 28 Feb 2024