· Recall that we issued a company update note on United U-Li Corporation Bhd (ULICORP) on 14/07/14. Its share price has since surged by 53.5% and outperformed the FBMKLCI by 55.7%. We recently caught up with the management and were convinced that there is still more upside due to its strong earnings prospects.

· Strong FY14 results. ULICORP ended FY14 with a stellar set of financial results with revenue and net profit growing strongly by 12% and 40% to RM172.3m and RM23.2m, respectively, thanks to higher sales and net margin (FY14: 13.5%, FY13: 10.7%) from cable support systems segment. This division’s revenue and pre-tax profit grew by 14% and 31% YoY, respectively, driven by stronger demand for core products. Note that this division made up 83% of total revenue in FY14.

· Capacity expansion. ULICORP is currently running at almost full-capacity in all its four manufacturing plants, located at Seri Kembangan, Taming Jaya, Balakong and Ipoh. Hence, it has embarked on a capacity expansion program and plans to construct two more new plants with hot dip galvanizing facility on its 9-acre land in Nilai. Upon completion by end-2015, these new plants will double its current capacity and also cut galvanizing outsourcing costs.

· Well-diversified clientele base. As the products of ULICORP are widely used in various sectors, the risk of a significant slowdown in overall demand is relatively low. Besides, we understand that demand from ASEAN countries is increasing from new development projects while demand from the Middle East has been flat. In fact, we understand that the management has been giving up a number of sizeable orders due to capacity limitation. On the local front, it is believed that demand will improve further with implementations of various government infrastructure projects and private sector investments in property, high rise residential and commercial developments.

· Margins to expand? At present, approximately 60% of the raw materials (steel coils and powder coating paints) used are obtained from Russia, Japan, South Korea, China and Taiwan while the balance is purchased from local suppliers. As such, the underlying subdued steel demand and prices should translate into lower raw material costs to the Group. Furthermore, with the hot dip galvanizing facility, we understand that the Group is able to save some RM3.0m-RM5.0m outsourcing costs per annum.

· Strong balance sheet to provide greater flexibility in operation and dividend policy. As at end-2014, the Group registered a net cash position of approximately RM50m or RM0.38/share. This solid balance sheet has been translating into better bargaining power in raw material sourcing & procurement. Besides, ULICORP has also started to dish out better dividend payout. In FY13, it only distributed a net dividend per share (NDPS) of 3.8 sen but this was increased to 10.0 sen in FY14. We understand that ULICORP is likely and able to distribute 12.0 sen NDPS in FY15, implying a yield of 4.5%.

· Going forward, we estimate the group’s revenue & net profit to continue growing, by 16.1% & 21.1% to RM200.0m and RM28.1m, respectively, in FY15, and further increasing by 15.5% & 30.4% to RM231.0m & RM36.7m in FY16 driven by: (i) 25% & 20% additional capacity in FY15 & FY16 as well as (ii) cost saving from hot dip galvanizing process.

· TRADING BUY with a Fair Value of RM3.50. We like: (i) the potential growth trajectory (of 21.1%-30.4% for FY15-FY16), (ii) net cash position, and (iii) decent dividend yield of 4.5%-5.2% for FY15-FY16. Our target price implies a FY16E PER of 12.5x. This valuation is inline with the FBMSC Index’s valuation but is at a >15% discount to steel and aluminium players under our coverage.

Source: Kenanga