United U-Li Corp Bhd
(April 7, RM2.78)
Trading buy with fair value of RM3.50: United U-Li Corp Bhd (UliCorp) ended its financial year ended Dec 31, 2014 (FY14) with a stellar set of financial results with revenue and net profit growing by 12% and 40% to RM172.3 million and RM23.2 million respectively, thanks to higher sales and net margin from its cable support systems segment. This division’s revenue and pre-tax profit grew by 14% and 31% year-on-year respectively, driven by stronger demand for core products. Note that this division contributed 83% of total revenue in FY14.

UliCorp is currently running at almost full-capacity in all its four manufacturing plants located at Seri Kembangan, Taming Jaya and Balakong in Selangor, and Ipoh. Hence, it has embarked on a capacity expansion programme and plans to construct two more plants with hot dip galvanising facility on its nine-acre (3.64ha) piece of land in Nilai. Upon completion by end-2015, these new plants will double its current capacity and also cut galvanising outsourcing costs.

As the products of UliCorp are widely used in various sectors, the risk of a significant slowdown in overall demand is relatively low. Besides, we understand that demand from Asean countries is increasing from new development projects, while demand from the Middle East has been flat. We understand that the management has been giving up a number of sizeable orders due to capacity limitation. On the local front, it is believed that demand will improve further with the implementation of various government infrastructure projects and private sector investments in property, high-rise residential and commercial developments.

At present, approximately 60% of the raw materials (steel coils and powder coating paints) used are obtained from Russia, Japan, South Korea, China and Taiwan, while the balance is purchased from local suppliers. As such, the underlying subdued steel demand and prices should translate into lower raw material costs to the group. Furthermore, with the hot dip galvanising facility, we understand that the group is able to save some RM3 million to RM5 million outsourcing costs per annum.

As at end-2014, the group registered a net cash position of approximately RM50 million or 38 sen per share. This solid balance sheet has been translating into better bargaining power in raw material sourcing and procurement. Besides, UliCorp has also started to give better dividend payouts. In FY13, it only distributed a net dividend per share (NDPS) of 3.8 sen but this was increased to 10 sen in FY14. We understand that UliCorp is likely and able to distribute 12 sen NDPS in FY15, implying a yield of 4.5%.

Going forward, we estimate the group’s revenue and net profit to continue growing by 16.1% and 21.1% to RM200 million and RM28.1 million respectively in FY15, and further increase by 15.5% and 30.4% to RM231 million and RM36.7 million in FY16 respectively, driven by 25% and 20% additional capacity in FY15 and FY16 respectively, as well as cost saving from hot dip galvanising process.

We like the potential growth trajectory (of 21.1%-30.4% for FY15-FY16), its net cash position, and decent dividend yield of 4.5%-5.2% for FY15-FY16. Our target price implies a FY16 estimated price earnings ratio of 12.5 times. This valuation is in line with the FTSE Bursa Malaysia Small Cap Index’s valuation, but is at a more than 15% discount to steel and aluminium players under our coverage.— Kenanga Research, April 7

This article first appeared in The Edge Financial Daily, on April 8, 2015.