Initial Public Offering (IPO)
IPO - Unitrade Industries Berhad
MQTrader Jesse
Publish date: Fri, 29 Apr 2022, 06:35 PM
Company Background
The company was incorporated in Malaysia under the Act on 13 April 2021 as a private limited company under the name of Unitrade Industries Sdn Bhd. On 15 September 2021, the company converted into a public limited company and adopted the present name. The group structure at LPD is as follows:
The company is principally involved in the wholesale and distribution of a wide variety of building materials for building and construction works such as pipes, valves, fittings, and accessories for M&E works; reinforcement steel, structural steel, and other building materials for civil works.
Use of proceeds
- Working capital - within 12 months (50.5%)
- Repayment of bank borrowings - within 12 months (39.8%)
- Capital expenditure for pipe fabrication center - within 36 months (5.0%)
- Estimated listing expenses - within 1 month (4.7%)
Working capital - within 12 months (50.5%)
The new warehouse has a built-up area of approximately 281,000 sq ft which is relatively larger as compared to the existing warehouse with a built-up area of approximately 123,000 sq ft. With this, the company is able to increase its operational efficiency and hold more inventories. After relocation, the Group has rented out the existing warehouse.
In conjunction with the new warehouse, they require a larger working capital base to grow the business, with which they will be better equipped to supply more projects simultaneously, projects of a larger contract value, and they can also increase the product range. The Group intends to hold a larger number of building materials to ensure customers’ expectations of a wide product range with timely deliveries can always be met without delays. As such, a total of RM50.5 million from the proceeds raised from the Public Issue will be allocated to finance the growth of the working capital, to be used in the following manner:
Repayment of bank borrowings - within 12 months (39.8%)
The company has allocated RM39.8 million from the proceeds of the Public Issue to partially repay the utilization of the bankers’ acceptance facilities. The interest rate and tenure of the banker’s acceptance are set out below:
The repayment of the bankers’ acceptance amounting to RM39.8 million is expected to result in interest savings of RM0.9 million to RM1.8 million per annum based on the interest rate of 2.30% to 4.58% per annum for the bankers’ acceptance.
Capital expenditure for pipe fabrication center - within 36 months (5.0%)
To complement the wholesale and distribution of pipes, they intend to enhance the offerings through the provision of value-added services for pipes in a new pipe fabrication centre that provides end-to-end pipe services to the customers. These services comprise pipe cutting, grooving, threading, welding, painting, and assembly.
The strategy is setting up a new pipe fabrication centre is based on customers’ increasing demand for such services, as well as the availability of space in the new industrial complex. This will enable the Group to take on opportunities anticipated from future business growth and expansion, arising from current and future demands from existing customers. This is expected to contribute to the growth of the financial performance.
The cost of setting up this new pipe fabrication centre is expected to be RM6.0 million, which comprises machinery and equipment as well as installation over 3 phases of approximately a year each phase, to which the company has allocated RM5.0 million from the proceeds of the Public Issue and RM1.0 million will be funded using internally generated funds and/or bank borrowings, the proportion of which will be determined at the point of the deployment of funds. The costs and production capacities expected to be attained from each phase are set out as follows:
The purchase, installation, and commissioning of machinery and equipment will take place progressively in three phases:
- For the first phase, the Group intends to purchase the machinery and equipment to set up all the required stations to offer cutting, grooving, threading, welding, and painting of pipes, which is expected to be completed within 12 months from the date of listing.
- In the second phase, the Group intends to purchase more machinery and equipment to expand the capacity of each station and improve the automation in the threading station, which is expected to be completed within 24 months from the date of listing.
- In the last phase, the Group intends to purchase additional machinery and equipment to expand the capacity of the grooving station, and further improve the automation in threading, welding, and painting stations, which is expected to be completed within 36 months from the date of listing.
Business Model
The Group’s business model is illustrated below:
Wholesale and distribution of building materials
The company is involved in sourcing, wholesale, and distributing a wide variety of building materials for building and construction works such as pipes, valves, fittings, and accessories for M&E works; reinforcement steel, structural steel, and other building materials for civil works. They source these products, in bulk, from the network of suppliers which they store in the warehouse to maintain an inventory of ready stock for the customers. Having an inventory of ready stock enables the Group to deliver the products to the customers in a timely manner.
Manufacturing and sale of pre-insulated pipes
The company is involved in the manufacturing and sale of pre-insulated pipes. Pre-insulated pipes are primarily used to transport and maintain the temperature of fluids in the pipes in underground or aboveground piping systems. Pre-insulated pipes prevent direct heat transfer between pipes to reduce energy loss and are used in a wide range of industrial, commercial, and domestic applications such as air-conditioning systems, electric heating, industrial processing as well as oil storage and handling.
Rental of temporary structural support equipment
The company provides rental of temporary structural support equipment such as scaffolding, steel plates, and hollow sections for use in various building and construction activities. Scaffoldings, steel plates, and hollow sections are reusable and can be repeatedly rented out to customers throughout their useful lifespan, which is typically 10 years. As such, the Group had, over the years, purchased scaffoldings, steel plates, and hollow sections to build our stockpile of rental assets.
Financial highlights
The following table sets out the financial highlights based on the combined statements of comprehensive income for FYE 2019 to FYE 2021 and FPE 2021 and 2022:
- Revenue does not grow continuously also reflects that management has faced great challenges in expanding the market. MCO had brought a challenge to the company.
- The gross profit margin shows 7.61% for FYE 2019, 7.51% for FYE 2020, and 8.66% for FYE 2021. Although the gross profit margin is growing from FYE 2019 to FYE 2021 the GP margin is still considered low if compare with the benchmark of 20% (Generally, a GP margin of 20% is considered high/ good).
- PAT margin shows 2.0% (FYE 2019), 1.9% (FYE 2020) and 2.8% (FYE2021).
- The gearing ratio is around 1.7 to 2.2 which is dangerous for the company's financial status. (Good gearing ratio should be between 0.25 – 0.5)
Major customer and suppliers
Major customers
According to the details, the top 5 customers only 14.9% of the revenue, which means the company will not face a single customer risk.
Major suppliers
Through the major supplier's table, we found that the company's top 5 suppliers are around 64.7% and the top 1 of suppliers is around â…“ of the total cost. This shows that the company has the advantage in the pricing bargain but the company might also face unexpected switching costs if they decide to change the suppliers.
Industry Overview
According to SMITH ZANDER research, the size of the building materials industry in Malaysia is represented by the apparent consumption of building materials in Malaysia increased from RM 97.76 billion in 2018 to RM 102.68 billion in 2019 but decreased to RM 91.01 billion in 2020 and 85.41 billion in 2021. The decline in 2020 and 2021 was due to the slowdown in construction and renovation/ refurbishment activities as a result of the movement control orders imposed by the Government due to the COVID-19 pandemic.
Building materials are used throughout the lifecycle of any structure such as buildings and infrastructure, and building materials are essential for the construction of buildings and infrastructure.
In the Economic Outlook 2022 published by the Ministry of Finance in October 2021, the construction GDP growth is projected to turn around by 11.50% in 2022, the premise of better performance of the construction industry subsectors (e.g. civil engineering, residential buildings, and non-residential buildings). The civil engineering subsector is anticipated to regain its positive growth, following the continuation and acceleration of major infrastructure projects such as LRT 3, MRT 3, RTS, and the Pan Borneo Highway. The residential buildings subsector is expected to expand further in line with the Government’s measures to address the shortage of affordable houses, including the continuation of the Rent-to-Own scheme, Rumah Mesra Rakyat, People’s Housing programs, and full stamp duty exemptions for the first residential property purchased by each Malaysian home-buyer. In addition, the non-residential buildings subsector is anticipated to improve, backed by ongoing commercial projects namely Kwasa Damansara, Tun Razak Exchange, and KLIA Aeropolis.
To stimulate the property market and provide financial relief to home-buyers, the Government has introduced several initiatives. In Budget 2021, the Government proposed to further extend the full stamp duty exemptions for the first residential property purchased by each Malaysia home buyer to 31 December 2025. Further in Budget 2022, the Government proposed that the real property gain tax is not levied on disposals made from the 6th year onwards, and allocated RM 250.00 billion for development expenditure from 2022 to 2024 to boost economic recovery.
BNM projects the Malaysian economy to expand within the range of 5.50% to 6.50% in 2022, supported by significant improvement in global trade, stabilized commodity prices, containment of the COVID-19 pandemic, and gradual improvement in consumer and business sentiments.
As the Malaysian economy strengthens after the impact of the COVID-19 pandemic subsides over time, the construction sector is expected to drive the recovery and future growth of the building materials industry in Malaysia.
Sources: SMITH ZANDER INTERNATIONAL SDN BHD
Plans and strategies for Unitrade Industries Berhad
- The company plan to consolidate the operations under its new industrial complex to enhance our operational efficiency.
- The company intends to enhance its offerings through the setup of a pipe fabrication center.
MQ Trader Views
Opportunities
- The company’s plan to expand the business to seek a bigger market, as an investor we will need to keep track of the expansion process by every quarterly report.
- The company offers an extensive range of about 6,319 SKUs of building material. They also hold a large inventory of ready stock and can cater to a broad range of customer requirements.
- High volume client base, therefore the company will not easily face the risk of high customer concentration.
Risk
- A high gearing ratio will affect the company finance’s status. It will reduce the company's risk tolerance.
- The low potential of growth is due to the slow growth of profit margin over the years.
- The inflation will reflect on the raw material price. An increase in the price of steel may lead to a rise in its cost of sales as well as its cost of maintaining the inventories. If the company is unable to pass on this increase in supply cost to the customers, they will bear higher operating costs and this may have a material impact on their financial results.
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