INVESTMENT HIGHLIGHTS

• FY17 earnings weaker than expected
• Earnings forecast reduced
• Nilai plant to start stronger earnings contribution in 2HFY18.
• Announced 1 for 2 bonus issue
• Maintain BUY with lower TP of RM3.23

FY17 earnings weaker than expected. United U-Li’s (U-Li) results came in below our full year estimates, making up 72.5% of our estimates and 70.7% of consensus’ forecast. This is mainly due to higher than expected raw material costs and operating costs. However, it has declared an interim dividend of 0.5sen. FY17 profits fell 38.3% yoy to RM19.2m due to higher raw material costs and operating costs. Revenue dipped marginally by 0.55% to RM200m while gross profit margin fell to 37.2% from 40.9% a year ago. Operating costs including administration costs (+12% yoy), selling and distribution costs (+9% yoy) and other expenses (+19% yoy) have risen compared to FY16.

Earnings forecast reduced. FY18F earnings is reduced to RM31.3m from RM45.3m as we assume lower revenue growth, higher raw materials and higher operating costs. We have reduced our topline estimate by 6.3% to RM235.9m from RM251.8m to factor in a more gradual contribution from the new plant.

Nilai plant to start stronger earnings contribution in 2HFY18. That said, we are positive as the contribution from the Nilai plant should start to pick up in 2HFY18 as operations stabilise. Recall that the plant has only started in early 2017. Demand for cable support and electrical products is expected to be healthy due to the slew of mega projects in the country as it is a market leader for cable support products locally. Meanwhile, it has also re-started to grow its export markets through overseas projects.

Announced 1-for-2 bonus issue. On a brighter note, the company has announced a 1-for-2 bonus issue on a date to be decided later. Upon completion of this exercise, its share base will be increased to 217.8m, which should further improve the liquidity of the stock.

Source: MIDF Research - 28 Feb 2018