1QFY22 CNP and dividend payment of 1.0 sen came in well within expectations. Thus, we keep FY22E/FY23E earnings unchanged. For the subsequent quarters, we expect strong product demand to continue buoying the group’s GP margins (of >40%) and earnings. Nonetheless, we reduce our TP to RM1.85 (from RM2.30) on lower PER of 8x (vs 10x) to reflect the less conducive market interest for steel-related companies given the dull steel market. Keep OP.

Within expectation. 1QFY22 CNP of RM12.1m came within our expectations at 24%. A 1.0 sen dividend declared is also within target.

QoQ, 1QFY22 CNP of RM12.1m came off 29% on: (i) lower revenue (- 9%) which led to lower GP (-13%), (ii) lower GP margins (-2ppt), and (iii) higher admin expenses (+83%). The lower revenue was due to lower tonnage volumes affected by seasonal festivities (Chinese New Year) while the weaker GP margin was attributed to higher average inventory costs on flat ASPs. Meanwhile, the higher admin expenses were due to bonus payments made to employees during the first quarter of the year.

YoY, 1QFY22 CNP increased 24% from higher revenue (+34%) which led to stronger GP (+22%). Nonetheless, we note that GP margin came off by 4ppt to 44% as 1QFY21 (previous year corresponding quarter) had supernormal margins arising from the inventory lag impact on rising steel prices.

Outlook. For quarters starting 2QFY22, admin costs are expected to rise by RM0.4m due to the minimum wage increase from RM1,200 to RM1,500 (as Ulicorp currently has c.400 foreign workers). We foresee 2Q earnings to remain flat QoQ due to seasonal festivals (Hari Raya) before recording a stronger 2H. Average material costs (CRC) for the group is expected to normalise as CRC prices have plateaued. Meanwhile, ASPs are expected to remain flat as demand for CSS products have remained strong coupled with the lack of competitors within ULICORP’s operating sphere. While the group face shortage of labour, their current workforce is sufficient to meet existing orders.

Maintain FY22E/FY23E earnings post results.

The market perception. Ulicorp is perceived by the broad market as a steel player whereby earnings are expected to rise and fall alongside steel prices – which we believe explains the single-digit PE. While this is partially true (where steel prices do impact earnings to a certain degree), the degree of impact from steel price gyration is much lesser compared to other listed steel players. This is because Ulicorp’s products are more niche and they have pricing power which explains their much stronger GP margins (unlike generic steel players which mostly follow market pricing).

Nonetheless, in the current dull steel market which is unlike FY21 when steel prices were skyrocketing, we feel it would be hard for investors to shrug off this market perception in the short term to re-rate valuations unless Ulicorp (i) delivers a much higher dividend payout of >60% (vs. FY21’s 25% payout) to boost yields OR (ii) record strong and sustainable earnings growth for consecutive quarters especially when steel prices comes off to showcase that ASPs for Ulicorp's product are less cyclical compared to other steel players.

As we feel that Ulicorp is unlikely to meet such re-rating criteria in the short term, we choose to conservatively reduce our PER valuation for the group to 8x (from 10x) to reflect the less conducive market interest for steel-related companies. Consequently, we reduce our TP to RM1.85 (from RM2.30) but reiterate our OP call.

Source: Kenanga Research - 25 May 2022