ULICORP’s 1HFY24 results disappointed. Despite a high plant utilisation in its cable support system segment, its core net profit fell 4% YoY dragged by higher-cost projects. As new capacity expansion is seen to come onstream from end-FY24 onwards, we remain confident ULICORP will be well positioned to benefit from the demand for cable support systems in the upcoming construction boom. We trim our FY24F and FY25F earnings by 21% and 3%, respectively, cut our TP by 3% to RM2.30 (from RM2.38). Maintain OUTPERFORM.

Below expectation. Its 1HFY24 core net profit of RM16.6m came in at only 32% of our full-year forecast. The variance against our forecast came largely from the weaker-than-expected demand for its cable support system products.

YoY, its 1HFY24 revenue was flattish, declining by 1%, weighed down by contribution from its cable support system segment (-3%) due to it operating below full capacity at 90% but partially offset by its electric lighting and fittings segment (+17%). Its core net profit dipped 14% mainly due to the completion of lower-margin projects in the cable support system segment.

QoQ, similarly, its 2QFY24 core net profit fell 4%, mirroring the YoY trend, due to the same reason of lower-margin projects completion in its cable support system segment.

Forecasts. We cut our FY25F earnings by 21% to reflect the delayed commissioning of the powder coating line and trim our FY26F numbers by 3% for housekeeping purposes.

Valuations. Consequently, we cut our TP by 3% to RM2.30 (from RM2.38) based on an unchanged 8x FY25F PER, in line with the average historical forward PER of the steel product sector. There is no adjustment to our TP based on ESG given a 3-star ESG rating as appraised by us (see Page 4).

Outlook. ULICORP’s earnings prospects are strong, driven by strong demand for its cable support systems on the back of a construction boom, both in the private space (data centres, warehouses, hospital projects, etc) as well as impending public mega projects (on-going and impending such as the East Coast Rail Link, Johor Bahru-Singapore Rapid Transit System, Bayan Lepas LRT and MRT3). The consolidation in the local cable support system market during the pandemic era (i.e.weak players shutting down permanently) has also led to reduced competition which augurs well for market leader ULICORP.

Investment thesis. We like ULICORP for: (i) being a proxy to the construction boom with its cable support systems, (ii) its dominant market position with a share of over 50% in the local cable support system market, and (iii) a strong war chest with a balance sheet in a net cash of RM99m. Maintain OUTPERFORM.

Risks to our call include: (i) volatility in the cost of input cold-rolled coil (CRC), (ii) a slowdown in the construction sector, hurting the demand for cable support systems, (iii) competition from low-cost producers in the region, and (iv) the delay of the plants.

Source: Kenanga Research - 28 Aug 2024