INVESTMENT HIGHLIGHTS

• FY18 earnings missed expectations

• Year-to-date net profit fell 85.2% yoy to RM2.9m

• 4QFY18 profit was down by 40.0% yoy to RM1.4m

• Maintain NEUTRAL with lower TP of RM0.53 (previously RM0.60)

FY18 earnings missed expectations. United U-Li’s (U-Li) earnings of RM2.9m for FY18 came in below full year estimates, making up 44% of ours and 19.9% of consensus’ forecasts. The negative variance was mainly due to maintenance and raw material costs that remained high. No dividend was declared for the year.

Year-to-date net profit fell 85.2%yoy to RM2.9m. That is despite revenue that improved by 1.8%yoy to RM203.5m. The higher revenue can be attributed to the cable support division which saw an increase of 2.1% to RM163.0m. However, pre-tax profit for this division fell 70.3%yoy to RM6.2m due to higher finance, depreciation and labour costs. It was worsened by the deteriorating gross profit (- 9.4 ppt-yoy) and pre-tax (-43.0 ppt-yoy) margins for the whole year. As for its electrical lighting and fittings division, revenue was up by 1.1% to RM40.55m. Pre-tax profit for this division fell 85.5%yoy to RM0.9m because of higher promotional, utilities, labour and maintenance costs. Export sales for the year have also declined by 10.3%yoy to RM24.5m.

4QFY18 profit was down by 40.0%yoy to RM1.4m as revenue declined by 7.0% to RM48.4m as customers stocked up in 3QFY18 because of the zero tax during that quarter. The profit before tax (PBT) of cable support systems increased to RM1.4m for the quarter from RM0.6m in the previous year mainly due to higher gross profit margin and lower selling and distribution costs. On the other hand, the PBT of electrical and lighting division fell to 0.05m from RM1.96m a year ago due to higher promotional and labour expenses. Sequentially, net profit decreased by 151.9%qoq as revenue fell 15.0%.

FY19 earnings estimate revised by -12.3% to RM9.54m as we expect profit raw material and operating costs to remain elevated. However, we expect an improvement compared to FY18 due to the revival of certain infrastructure projects.

Maintain NEUTRAL with lower TP of RM0.53 (previously RM0.60) as we cut our earnings estimate. Our TP is derived from 12x PER on FY19F EPS of 4.4 sen. We are Neutral on the stock as its profitability has declined compared to previous years. On a positive note, its balance sheet is still healthy with a net cash of RM8.7m.

Source: MIDF Research - 28 Feb 2019