INVESTMENT HIGHLIGHTS

• 9MFY18 earnings missed expectations

• Earnings for 9MFY18 dropped 78.6% yoy to RM4.1m

• Trim earnings estimates by -41%/-16% in FY18F/F19F

• Maintain NEUTRAL with lower TP of RM0.60 (previously RM0.71)

9MFY18 earnings missed expectations. United U-Li’s (U-Li) results came in below our full year estimates, making up 38% of our estimates and 45% of consensus’ forecast. The negative variance is mainly due to maintenance and raw material costs that remain high. As expected, no dividend was declared for the quarter.

Earnings for 9MFY18 dropped 78.6% yoy to RM4.1m due to higher raw material costs and operating costs despite revenue increasing by 4.9% to RM155.1m. The increase in revenue is mainly attributed to the 5.1% increase in sales from the cable support systems division. Gross profit margin was compressed to 24.5% from 35.0% a year ago due to higher raw material cost. Its lower profit margin is also a result of higher finance, maintenance, utilities and depreciation costs. The increase in volume is not enough to offset the fixed costs following the full operation of the Nilai plant which led to the decline in EBIT margin from 14.7% to 6.4%. Contribution from exports for the period has also declined to 11.4% from 14.3% in the previous year.

3QFY18 profit was down by 63.4% to RM2.4m although revenue increased by 3.4% to RM57.0m, which is contributed by the electrical lighting and fittings division that rose by 28%.

Sequentially, EBIT improved by 87% due to lower admin and other operating costs and slightly better gross profit margin in 3QFY18. This is also helped by revenue that jumped by 14.8%qoq.

Trim earnings estimates by -41%/-16% in FY18F/F19F to RM6.5m and RM10.9m respectively as we expect profit raw material and operating costs to remain elevated.

Maintain NEUTRAL with lower TP of RM0.60 (previously RM0.71) as we lower our earnings estimates. Our TP is derived from 12x PER on FY19F EPS of 5.0 sen and our valuation method is unchanged. We are Neutral on the stock due to persistently high raw material and operating costs.

Source: MIDF Research - 29 Nov 2018