INVESTMENT HIGHLIGHTS

• 1HFY18 earnings missed expectations

• Earnings for 1HFY18 dropped 86.4%yoy to RM1.7m

• Sequentially, EBIT improved by 30% due to lower admin costs

• Trim earnings estimates by -47.9%/-44.3% in FY18F/F19F

• Maintain NEUTRAL with lower TP of RM0.71 (previously RM1.15)

1HFY18 earnings missed expectations. United U-Li’s (U-Li) results came in way below our full year estimates, making up merely 8.3% of ours and 10.3% of consensus’ forecasts. The negative variance can be attributed to higher maintenance and raw material costs. As expected, no dividend was declared for the quarter.

Earnings for 1HFY18 dropped 86.4%yoy to RM1.7m due to higher raw material costs and operating costs even though revenue increased by 5.8% to RM98.1m. Gross profit margin was compressed to 29.6% from 43.0% 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 19.9% to 3.5%. Contribution from exports for the period has also declined to 12.2% from 16.2% in the previous year, which is disappointing as we previously anticipated that exports will be one of the key sales drivers following its capacity expansion. That said, export sales may pick up in 2HFY18.

Sequentially, EBIT improved by 30% due to lower admin costs in 2QFY18. This is due to revenue that climbed by 2.3% to RM49.6m.

Trim earnings estimates by -47.9%/-44.3% in FY18F/F19F to RM10.9m and RM12.9m respectively due to higher raw material prices and operating costs estimates.

Maintain NEUTRAL with lower TP of RM0.71 (previously RM1.15). Our TP is derived from 12x PER of FY19F EPS of 5.9 sen. We maintain our valuation method of 12x PER and roll our base year into FY19F.

Source: MIDF Research - 29 Aug 2018