ULICORP’s recent weak 3QFY23 results were a blip — due to a 10- day breakdown of its hot-dipped galvanized line. To make up for the shortfall, it sold more powder coating products but they came with lower margins. Its prospects are intact on the back of a booming construction market. We maintain our forecasts, TP of RM2.18 and OUTPERFORM call.

We came away from a post-results engagement with ULICORP remaining positive on its prospects. The key takeaways are as follows:

1. We understand that its recent weak 3QFY23 results were a blip — largely due to a 10-day breakdown of its hot-dipped galvanized line, resulting in its inability to recognise RM6m sales during the quarter. To make up for the shortfall, it sold more powder-coating products but they came with lower margins. Its utilisation rate stayed robust at 85%.

2. In terms of demand, it remains bullish on the outlook for its cable support system products underpinned by on-going and upcoming public infrastructure projects, including MRT3, RTS, ECRL and data centre projects. Thus far, ULICORP has completed 20 data centre projects, collaborating with industry leaders such as Microsoft, Facebook, YONDR, etc. At present, its order backlog stands at RM50m.

3. Its new powder coating line at its plant in Nilai is on track for completion by end-2023, which will boost its capacity by >10%.

Forecasts. Maintained.

We also keep 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 RM99m 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 - 23 Nov 2023