Amidst strong demand, ULICORP is outsourcing the production of certain products pending the completion of a new line. Its expansion plans to broaden its product offerings are on track. Meanwhile, it is benefitting from a weak MYR given overseas sales making up about 20% of its total revenue. We raise our FY23F earnings by 2% but maintain our TP of RM2.18 and OUTPERFORM call.

We came away from a recent visit to ULICORP’s plant in Nilai feeling reassured of its prospects, underpinned largely by the strong demand for its cable support systems (i.e. cable tray, cable ladder, cable trunking, etc). The key takeaways from the visit are as follows:

1. ULICORP is outsourcing certain hot-dipped galvanized products as the production line (see image on the next page) is presently operating at full capacity. It is constructing a new line in its plant in Nilai, which is expected to come onstream by end-2025. Meanwhile, a new powder coating line (also see image on the next page) will come online by end-2023.

2. It remains bullish on the outlook for its cable support system products driven by on-going and impending public infrastructure projects such as MRT3, Johor Bahru-Singapore Rapid Transit System, East Coast Rail Link and a wave of data centre projects. ULICORP revealed that there is a pickup in orders from Sarawak of late driven by public spending and private investment.

3. ULICROP’s expansion plans to broaden its product offerings including GI steel conduit, PVC conduit, lighting poles and guard rails are on track. It will start to roll out these products by FY25.

On a separate note, ULICORP is benefitting from a weak MYR given overseas sales, predominantly to Singapore, make up about 20% of its total revenue.

Since 1 Jul 2023, SGD/MYR has averaged at 3.44, vs. our full-year FY23F assumption of 3.30. We are raising our FY23F net profit by 2% assuming an average SGD/MYR of 3.45 in 2HFY23.

We hold the view that MYR will recover some lost ground against SGD in FY24. However, if SGD/MYR were to stay at 3.45 throughout FY24, our FY24F earnings would be revised up by 4%, translating to a TP that is also 4% higher at RM2.26.

Recall, the demand for ULICORP’s cable support systems in Singapore is driven by the city-state’s massive spending on public infrastructure projects comprising MRT Singapore (Thomson, Eastern Region, Circle, Jurong Region and Cross Island lines), Changi Airport’s Terminal 5, several data centres, and hospital expansion projects. Apart from Singapore, ULICORP is exploring opportunities in Australia, predominantly in the booming mining sector.

Forecasts. We raise our FY23F earnings as mentioned above.

However, we maintain our TP of RM2.18 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 5).

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, (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 - 2 Nov 2023