ULICORP’s 1HFY22 results missed expectations due to reduced margins as it marked down selling prices of its products, predominantly cable support systems, to stay competitive. We understand that ULICORP carries inventory made from high-cost cold-rolled steel (CRC). We cut our FY22/23F net profit forecasts by 41%/46% respectively, lower our TP by 42% to RM1.08 (from RM1.85) and downgrade our call to MARKET PERFORM from OUTPERFORM.

Below expectations. 1HFY22 CNP missed our expectations at only 39% of our full-year forecast. The variance came largely from reduced margins as ULICORP marked down selling prices of its products, predominantly cable support system, to stay competitive. We understand that ULICORP carries inventory made from high CRC (when CRC prices peaked in recent months and subsequently plunged, see Chart on Page 2). This also explains ULICORP’s flat 1HFY22 net profit despite a 44% yoy surge in turnover. Not helping either, was the higher labour cost following the hike in the minimum wage from RM1,200 to RM1,500 during the quarter.

Outlook. The reopening of the economy domestically and regionally will augur well for the demand for ULICORP’s cable support systems which are widely used in the transportation, manufacturing and healthcare sectors. However, its near-term margins will continue to be weighed down by high-cost inventory, partially mitigated by its dominant position in the cable support system market that may translate to a slight premium for its products. Given the volatility in input cost and a less than rosy economic outlook globally, ULICORP deferred its expansion plan for a year to FY23F.

We cut our FY22/23F net profit forecasts by 41%/46% respectively to reflect the impact of high-cost inventory on margins and lower our TP by 42% to RM1.08 (from RM1.85) based on 8x FY23F PER, in line with the sector’s valuations during a downturn. There is no adjustment to TP based on ESG for which it is given a 3-star ESG rating as appraised by us (see Page 4). Downgrade our call to MARKET PERFORM from 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 - 25 Aug 2022