ULICORP (7133) United U-Li Corporation - 9MFY20 Above expectations
3QFY20 CNP of RM5.1m lifted 9MFY20 CNP to RM0.1m - way above our loss expectations of RM6.7m. The positive deviation stems from higher margins as Ulicorp regained their position to command better product pricing as competition in this fragmented space was generally shaken out during this pandemic. No dividends as expected. Post results, we upgrade FY20-21E earnings to RM10.2-22.4m. Consequently, call is also upgraded to Outperform with a higher TP of RM0.85.
Superb results. 3QFY20 core net profit (CNP) of RM5.1m lifted 9MFY20 CNP to RM0.1m - way above our loss expectation of RM6.7m. This positive surprise mainly stems from higher operating margins as Ulicorp regain their footing to command better product pricing as competition within this fragmented space were generally shaken out during this pandemic. No dividends as expected.
QoQ, 3QFY20 returned to the black with CNP of RM5.1m from a RM4.4m loss posted in 2QFY20 which was bogged down by the 2-month MCO. Meanwhile, 9MFY20 CNP of RM0.1m actually improved from a RM1.1m loss suffered in 9MFY19 despite the lockdowns faced in FY20 as EBITDA margin improved to 9% (+3ppt) due to: (i) better product pricing power, and (ii) lower administrative, SG&A and labour expenses.
Blessing in disguise. Being the largest cable support system player in a fragmented industry, Ulicorp’s smaller competitors which crowded out the space in 2017, have either quit, downsized or been shaken out given the lackluster demand experienced in this pandemic stricken year. To exacerbate the situation further, the recent lack of supply of cold rolled coils (raw material for cable support system manufacturers) within the local market placed Ulicorp on the priority buying list (given their size) while the smaller players were sidelined.
On the cusp of an upcycle. Moving into FY21, in tandem with our anticipation of pump priming activities, we believe Ulicorp will benefit from a pick-up of construction-related demand in a significant manner given the lack of competition within the space – leading towards sustainable earnings for the foreseeable future.
Earnings upgrade. Post results, we upgrade FY20-21E earnings to RM10.2-22.4m (from a loss estimate of RM6.7-1.5m) after adjusting for improved margins imputing the more favourable industry narrative.
Upgrade to OUTPERFORM with higher TP of RM0.85 (from Neutral; TP: RM0.375) pegged at 8x FY21E PER (previously 0.3x PBV). We switched our valuation methodology from PBV to PER as we foresee earnings to be sustainable ahead. Our 8x targeted PER is derived from the normalized PER levels of steel players (i.e. Annjoo) during the 2016- 2018 period when profitability of steel players were consistent.
Risks to our call include: (i) lower-than-expected sales of CSS products, and (ii) its inability to pass on higher steel prices.
Source: Kenanga Research - 20 Nov 2020