ULICORP’s 9MFY22 net profit beat our expectation on higher-than-expected margins from its cable support systems segment thanks to the stronger USD against MYR, which more than offset its high carrying inventory costs. We raise our FY22-23F net profit forecasts by 25%/13% respectively, increase our TP by 26% to RM1.36 (from RM1.08) but maintain our MARKET PERFORM call.
Above expectations. Its 9MFY22 net profit already met our full-year forecast on higher-than-expected margins from its cable support systems (CSS) segment thanks to the USD’s strength against MYR which more than offset its high carrying inventory costs. ULICORP sells its products to Singapore in USD (USD:MYR strengthened by 5% from 4.40 to 4.63 in 3QFY22). Typically, its exports to Singapore make up c.20% of total turnover.
Result highlights. Its 9MFY22 net profit improved 8% as revenue surged 46% on stronger demand for cable support systems as it rebounded from a pandemic-stricken period a year ago.
Outlook. The reopening of the economy domestically and regionally will augur well for the demand for ULICORP’s cable support systems which are widely used in the transportation, manufacturing and healthcare sectors. However, margins have come off from a high base a year ago weighed down by high-cost inventories as input material prices i.e. cold rolled coil (CRC) have retreated from the high (refer page 2 for CRC price chart). Nonetheless, such margin contraction is cushioned by the stronger USDMYR and its dominant position within the cable support system market which translates to a premium for its products. Meanwhile, given the volatility in input cost and a less than rosy economic outlook globally, ULICORP has deferred its expansion plans for a new warehouse and a workers’ hostel to 2HFY23.
Forecast. We raise our FY22/23F net profit forecasts by 25%/13% respectively to reflect the stronger USD to MYR.
We like ULICORP for: (i) it being a reopening play given the recovery in demand for its cable support system products used widely within buildings and infrastructures; (ii) its dominant market position with a market share in excess of 50% in the local cable support systems space; and (iii) its balance sheet with a net cash of RM54m allowing the group to pursue capacity expansion or give out attractive dividends. However, the sharp fall in steel prices over the past six months has weighed on down on its product prices and hence margins.
Post earnings, we increase our TP by 26% to RM1.36 (from RM1.08) based on unchanged 8x FY23F PER, in line with the sector’s valuations during a steel price downturn. There is no adjustment to our TP based on ESG given a 3-star ESG rating as appraised by us (see Page 4). Maintain MARKET PERFORM.
Risks to our call include: (i) Volatility in the cost of input CRC; (ii) a slowdown in the global economy including the transportation and manufacturing sectors, hurting the demand for cable support systems; and (iii) Intensifying competition from low-cost producers in the region.
Source: Kenanga Research - 23 Nov 2022