U-Li Corporation (U-Li) is a leading cable support system manufacturer and a supplier of integrated ceiling system and light fittings products. We believe the company is poised to benefit from the: (i) resolution of its shareholders’ dispute and (ii) current capacity expansion plans. While we do not assign any rating to the stock, we believe it should be valued at RM2.15, based on 11.5x FY15 EPS, which is inline with the average PE valuation for small cap stocks. Currently, U-Li offers decent yields of 4%-6%.

Background. U-Li is a leading cable support system manufacturer in Malaysia and Singapore, commanding 40% share of the market. Notably, U-Li is the only listed company of its kind listed on the main market of Bursa Malaysia. Besides, the company also provides an array of integrated ceiling system and light fittings products. So far, it has made inroads into the telecom, O&G, transport, power, water and construction sectors. U-Li has four manufacturing plants, located at Seri Kembangan, Taming Jaya, Balakong and Ipoh.

U-Li back on growth path. It was not all smooth sailing for U-Li as the company experienced a muted growth phase which lasted for 4 years (from 2007 to 2010) dragged down by a family/shareholders dispute between Lee Yoon Fook and his two other siblings, Dato’ Wira Lee Yoon Wah and Dato’ Lee Yoon Kong. Consequently, the business was adversely affected and was not positioned to achieve its potential. However, with the disputes finally resolved, Dato’ Wira Lee as Managing Director is now able to concentrate on spearheading U-Li into the next phase of growth.

Expansion plans. The initial step taken by Dato’ Wira Lee was to acquire a plot of industrial land and factory at Nilai with the intention to expand U-Li’s operational capacity. For this year and 2015, management intends to spend a total of RM30m in capex to acquire production machineries. We believe the company is capable to finance the purchase via internally generated funds given its strong operating cash flow coupled with its net cash pile of RM36.3m as at 1Q14. Management expects its revenue to be enhanced by +RM100m when these assets are fully operational. We gathered that U-Li is currently operating at ~80% utilisation rate with a robust outstanding project orderbook of RM100m. At the moment, notable jobs under its belt include the supply of cable support system to Tanjung Bin Power Plant, Petronas Bintulu LNG Terminal, MRT stations and Terminal 4, Changi Airport.

1Q14 earnings up 144% YoY. Typically a weak quarter, U-Li registered a stellar set of financial results in 1Q14 thanks to the pent-up demand for its cable support system where revenue from this business segment grew 31% YoY, representing 86% of total sales during the period. As a result, its bottom-line rose by 144% YoY on the back of higher utilisation rate. To err on the conservative, we are forecasting FY14-FY15 net profit growth of 12%-33%, respectively.

Not rated. We value U-Li at RM2.15, based on 11.5x FY15 EPS, which is inline with the FBM Small Cap Index. That said, the stock is currently trading above its 5-year forward average PE of 6.3x. However, we opine that a valuation re-rating is warranted as U-Li is a rejuvenated entity with exciting growth prospects. Furthermore, there are indications of a generous dividend payout in the future given its strong cash coffers. Assuming a DPR of 50%, U-Li could offer decent yields of 4%-6%.

Source: Kenanga