INVESTMENT HIGHLIGHTS

• 1QFY18 earnings disappointed

• Profit for 1QFY18 plunged 81.0% yoy to RM0.6m

• Earnings cut by -33.5%/-34.5% in FY18F/F19F

• Downgrade to NEUTRAL from BUY with lower TP of RM1.72 (previously RM3.23)

1QFY18 earnings disappointed. United U-Li’s (U-Li) results came in below way below our full year estimates, making up 1.9% of our estimates and 2.1% of consensus’ forecast. The underwhelming results can be attributed to higher maintenance, operating, depreciation and raw material costs. No dividend was declared for the quarter.

Profit for 1QFY18 plunged 81.0% yoy to RM0.6m due to higher raw material costs and operating costs even though revenue increased by 4.8% to RM48.5m. Gross profit margin was compressed to 29.4% from 34.0% a year ago due to higher raw material costs. We believe that the increase in volume is not enough to offset the fixed costs following the full operation of the new Nilai plant which led to the decline in EBIT margin from 8.3% to 3.1%. Contribution from exports has not picked up as strongly during the quarter.

Earnings cut by -33.5%/-34.5% in FY18F/F19F to reflect lower margins and higher costs. This is also premised on sales estimates that are revised by -7.5%/-8.2% in FY18F/FY19F to RM20.8m/RM23.2m respectively.

Bonus issue approved. Meanwhile, shareholders have approved the proposal on the 1-for-2 bonus issue, which will enlarge its share base to 217.8m.

Downgrade to NEUTRAL from BUY with lower TP of RM1.72 (previously RM3.23). Our TP is derived from 12x PER of FY18F EPS of 14.33 sen. We have also lowered our PER valuation from 15x to 12x, which is -0.6x SD below its 5-year mean PER of 16.4x. We are turning cautious as local sales make up more than 80% of the group’s total sales. This is in view of the uncertainties surrounding the mega projects in the country, which may have an adverse impact in demand for its products. That said, we expect overseas sales to pick up in 2HFY18

Source: MIDF Research - 1 Jun 2018