ULICORP’s 1QFY23 results missed our forecast. Its latest results show that its recovery from the pandemic has been inconsistent and it is struggling to pass on higher cost to end-customers. We cut our FY23-24F earnings forecasts by 22% and 19%,  respectively, reduce our TP by 15% to RM1.15 (from RM1.36) and downgrade our call to MARKET PERFORM from OUTPERFORM.

Results below our expectation. 1QFY23 net profit of RM3.2m missed our forecast, coming in at only 10% of our full-year forecast. The key variances against our forecast came from its inconsistent recovery and higher staff cost following the recent revision in the Labour Act.

Results’ highlights. YoY, 1QFY23 revenue dropped 14%, mainly due to lower contributions from both cable support system (-15% YoY), and electric lighting and fittings (-6% YoY) segments. Core net profit plunged 74% on higher staff and input CRC costs.

Outlook. As the economy steadily recovered, demand for ULICORP’s cable support systems that are widely used in the transportation,  manufacturing and healthcare sectors is expected improve in tandem. The pandemic has led to the consolidation of industry players, and subsequently, easing of competition in ULICORP's operating space.

However, margins could see compression due to the revised Labour  Act resulting in higher staff cost. Furthermore, we remain cautious over the flat steel prospects as inflation and rising interest rates may curtail demand for steel despite the rebound in CRC prices (a key input) from the low since Nov 2022 (see Page 2). To recap, ASPs of ULICORP’s  cable support systems typically move in tandem with CRC prices.

Forecasts. We cut our FY23-24F earnings forecasts by 22% and 19%,  respectively, to reflect higher staff cost.

Consequently, we lower our TP by 15% to RM1.15 (from RM1.36) based on 8x FY24F PER - in line with the sector’s historical valuations during a steel price downturn. There is no adjustment to our TP based on ESG given a 3-star ESG rating as appraised by us (see Page 4).

Investment thesis. We like ULICORP for: (i) it being a reopening 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 balance sheet with a net cash of RM99m allowing the group to pursue capacity expansion or pay attractive dividends. However, its latest results show that its recovery from the pandemic era has been inconsistent and it is struggling to pass on  higher cost to end-customers. Downgrade 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 - 24 May 2023