ULICORP has seen a strong pick-up in orders for its key product, i.e. cable support systems, and is bracing for even busier times ahead driven by potential orders from MRT3, RTS, Singapore MRT expansion and new data centres. It is investing in two new plants that will boost its capacity by 40%. Hence, we significantly raise our FY23-24F earnings by 68% and 79%, respectively, lift our TP by 79% to RM2.18 (from RM1.22). Maintain OUTPERFORM.

We came away from a recent engagement with ULICORP feeling upbeat on its prospects, driven largely by its cable support systems segment (i.e. cable tray, cable ladder, cable trunking, etc). The key takeaways are as follows:

1. There are currently 81 ongoing projects secured this year which are anticipated to bolster its short-term revenue. Noteworthy ventures encompass high-tech initiatives like the Intel Pelican project, along with key infrastructural engagements such as LRT3, KL118, and several data centre projects (i.e. Microsoft and YONDR), hospitals and MRT projects in Singapore. Concurrently, the company has indicated an uptick in orders, corresponding with the gradual resumption of construction activities in the local regions and Singapore. Currently, its total order book is valued at RM80m which is expected to keep them busy for 2-3 months.

2. The mega projects lined up for the next five years including MRT3, RTS (Malaysia), ECRL, HSR, MRT Singapore (Thomson, Eastern Region, Circle, Jurong Region and Cross Island line) and several data centres are poised to ensure consistent revenue and foster growth in the years to come. Having the largest market share in cable support system, which has also become less competitive after the pandemic era, we believe ULICORP stands a strong opportunity to secure these jobs.

3. At a utilisation rate of 85% presently, ULICORP has little room to cope with rising demand. Hence, it is investing in two new plants in Nilai on a 20-acre plot (est. completion by 1QFY25) and a 9.5-acre plot (est. completion by FY26), which will boost its production capacity by 40%. It plans to move all its machinery from its existing Seri Kembangan plant to the new plants and reconfigured the Seri Kembangan plant into a warehouse. More importantly, the group will introduce several new lines (i.e. hot dipped galvanised lines, light pole production lines, steel and PVC conduit lines and guard rail lines) to serve both its existing and new products.

4. The group intends to expand its product range by branching out into GI steel conduit, PVC conduit, lighting poles and guard rails which are aligned with its existing business expertise. The products are expected to kick start by FY25 and command high margins of at least 30% (as guided by the group).

Forecasts. We raise our FY23-24F earnings by 68% and 79%, respectively, to reflect: (i) higher demand for its cable support systems segment backed by growth initiatives (ECRL, MRT3, HSR, RTS, etc), and (ii) stronger margins on reduced competition and insourcing of the galvanizing process.

Consequently, we raise our TP by 79% to RM2.18 (from RM1.22) based on 8x FY24F PER, in line with the average historical forward PER of the steel product sector. 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) its dominant market position in the local cable support systems space with a market share of over 50%, (ii) the strong pick-up in orders for its key product, i.e. cable support systems widely used in buildings, manufacturing facilities and infrastructure projects upon economy reopening, (iii) the industry consolidation during the pandemic era (i.e. weak players shutting down permanently) that has reduced competition which augurs well for remaining players such as ULICORP, and (iv) its net cash position of RM97m that translates to a strong war chest or allowing it to pay attractive dividends. Maintain 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 - 22 Sept 2023