United U-Li Corporation (ULICORP)’s 1HFY23 core net profit was at RM19.4m. YoY, 1HFY23 revenue dropped 6% due to lower contribution from its cable support system unit.
“However, core net profit increased 3% on reduced input costs, particularly, lower carrying cost of flat steel inventory,” said Kenanga Research (Kenanga) in the recent Results Note.
QoQ, 2QFY23 net profit surged 4x due to higher revenue on stronger demand for both cable support systems and electric lighting and fittings, reduced admin expenses and lower carrying cost of flat steel inventory.
“On the assumption of a stable economic outlook, we expect sustained demand for ULICORP’s cable support systems widely used in transportation, manufacturing and healthcare sectors,” said the research house.
The industry consolidation during the pandemic era had reduced competition which augured well for remaining players such as ULICORP. However, they are mindful of the heightened volatility in flat steel prices amidst mixed macro signals, such as the persistently high inflation in the West but deflation in China, sustained high interest rates and a weak economic outlook globally.
As ULICORP holds a sizable flat steel inventory while its product prices move in tandem with spot CRC prices, this may hurt its margins.
“We like ULICORP for it being a reopening play given the recovery in demand for its cable support system products widely used in buildings and infrastructures, its dominant market position with a market share of over 50% in the local cable support systems space, and its net cash position of RM97m that translates to a strong war chest or allowing it to pay attractive dividends,” said Kenanga.
Kenanga suggests a Target Price of RM1.22 and the Outperform rating. Risks identified by Kenanga are such as the volatility in the cost of input CRC, a slowdown in the global economy including the transportation and manufacturing sectors, hurting the demand for cable support systems, and intensifying competition from low-cost producers in the region.
