Investment Highlights

• 9MFY17 earnings below expectation

• 9MFY17 profit fell 26.8% yoy to RM19.0m

• Earnings forecast cut by 22%/4% for FY17F/FY18F

• Maintain BUY with lower TP of RM4.68

9MFY17 earnings below expectation. United U-Li’s (U-Li) results came in below expectations, making up 56%/52% of our estimates and consensus’ forecast. This is due to slower-than-expected sales growth as well as higher raw material and operating costs. It has not declared any dividend ytd.

9MFY17 profit fell 26.8% yoy to RM19.0m due to higher operating costs and revenue which dipped by 2.2% yoy to RM147.9m. Operating costs such as administration costs (+8% yoy), selling and distribution costs (+5% yoy) have risen compared to the previous corresponding period while operations at its Nilai plant have not reached optimal efficiency.

3QFY17 profit declined by 31.3% qoq to RM6.5m mainly due to higher raw material costs as well as higher operating expenses although revenue improved by 18.6%qoq to RM55.1m. We estimate that raw material prices could have increased by about 20% qoq. The higher revenue was attributed to the higher demand for electrical products during the quarter.

Earnings forecast cut by 22%/4% for FY17F/FY18F to RM26.27m/RM45.33m as we assume lower revenue growth and higher operating costs. We have reduced our topline estimates by 8.5%/7.1% in FY17F/FY18F to RM203.8m/RM251.8m due to the weaker-than-expected boost from the Nilai plant. That said, we are still positive on its FY18F prospects as we expect operational advancement from the Nilai plant as it had only started operations early 2017. Demand for cable support and electrical products is expected to be healthy due to the slew of mega projects in the country as it is a market leader for cable support products locally.

Maintain BUY with lower TP of RM4.68 (previously RM4.88). We have lowered our TP due to the changes in our FY18F EPS forecast of 31.22 sen from 32.51 sen. We have also taken a more conservative assumption on its dividend payout as the company reserves its cash for expansion. We have reduced our FY17F/FY8F DPS to 5.0sen /9.0 sen from 12.0sen/12.0sen previously. Our valuation method is unchanged at 15x PER. U-Li’s balance sheet is still sturdy with net gearing of 1.8%.

Source: MIDF Research - 29 Nov 2017