• FV of MYR0.33 on 12x FY23F (Mar) P/E. Unitrade Industries intends to raise MYR100m from the public issue of 312.5m shares – mainly for the working capital expansion to further enlarge its inventory and tap into new products. Future earnings will be anchored by its enhanced warehousing capacity, which has 8,301m cu m of racking storage area, enabling the group to supply more projects simultaneously. Demand for building materials may be underpinned by increased piping works and better construction activity due to Mass Rapid Transit 3 (MRT3) contract rollouts.

• Manageable business concentration risk. Unitrade’s top five customers only make up 14.9% of total FY21 revenue, which means the group faces a low customer concentration risk. Revenue sustainability is deemed commendable, as its products cater for the full lifecycle of buildings and infrastructure, ie construction, refurbishment, retrofitting, and repair & maintenance. Meanwhile, the group’s long-standing relationship with its major suppliers has enabled better purchasing and cost efficiencies – one of its largest suppliers has been dealing with Unitrade for 13 years. At the same time, the group is not reliant on any single original equipment manufacturer (OEM) to manufacture its in-house Alfran and S2S branded products. As such, risk of delivery delays can be minimised, helping to maintain customers’ trust in Unitrade’s abilities in executing orders.

• Earnings estimates. We are projecting a 5-year earnings CAGR of 19.8% for Unitrade, largely in tandem with better product mix and demand. For instance, the pipe fabrication centre and bigger warehouse can allow for the catering of more products to customers. As such, gross margins are estimated to stay at 8-9% in FY22-24. Sales costs are managed by keeping inventory of other products that are of higher margins, eg pipes, valves, and fittings – these are under the mechanical & engineering (M&E) segment. The group also does not keep stock its lower-margin items such as reinforcement steel under the civil works segment – most are purchased on a back-to-back basis with the sales department. Therefore, Unitrade is not significantly exposed to the risk of steel price fluctuations for lower-margin products.

• Valuation. We ascribe a FV of MYR0.33 based on a target 12x FY23F P/E. For peer comparison purposes, we chose companies involved in the construction sector, eg Gamuda (GAM MK, NEUTRAL, TP: MYR3.55) Sunway Construction (SCGB MK, BUY, TP: MYR1.93), Kerjaya Prospek (KPG MK, BUY, TP: MYR1.56), MGB (MLG MK, BUY, TP: MYR0.99), and Gabungan AQRS (AQRS MK, BUY, TP: MYR0.60). Our target P/E of 12x is derived by applying a 20% small cap discount on the Bursa Malaysia Construction Index’s 3-year average P/E of 15x – it is below the peers’ historical 5-year average P/E range of 12.7-21.4x.

• Key risks: Fluctuations in the price of steel products, intense competition amongst other companies, and disruption of supply from suppliers.

Source: RHB Securities Research - 13 May 2022