While new capacity expansion expected by Dec 2024 positions ULICORP to capitalize on rising demand ahead of an anticipated construction boom, its 9MFY24 results was a miss to expectations due to margin compression as it marked down ASP of its products to stay competitive. This was further compounded by reflecting CRC inventory procured at higher cost (weaker MYR). We cut our FY24F/FY25F earnings by 23%/15% respectively. Our lowered TP, which is still in line with historical averages considering its prospects, is lowered by 19% to RM1.86 (from RM2.30), which commensurate with a MARKET PERFORM, lowered from OUTPERFORM.

Below expectation. Its 9MFY24 core net profit of RM22.7m fell short of expectations, coming in at only 55% of our full-year forecast. The variance against our forecast came largely from the weaker-than- expected ASP and margins for its cable support system products.

YoY, its 9MFY24 revenue fell 5% dragged by the lower ASP from its cable support system segment (-8%). Its core net profit declined by a sharper 26% largely due to the margin compression (-4ppts) as ULICORP carries inventory made from higher-cost CRC (see chart on Page 2).

QoQ, similarly, its 3QFY24 core net profit fell 25%, reflecting a similar trend seen YoY, as the cable support system segment continued to be impacted by the high-cost inventory.

Forecasts. We cut our FY24F/FY25F earnings by 23%/19%, respectively, to reflect lower ASP and the impact of high-cost inventory on margins.

Valuations. Consequently, we lower our TP by 19% to RM1.86 (from RM2.30) 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 an anticipated 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. Downgrade our call to MARKET PERFORM from 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.

Segmental Highlights External Revenue (RM m) 3Q24 2Q24 QoQ 3Q23 YoY 9M24 9M23 YoY Cable Support Systems 50.8 52.6 -3% 60.4 -16% 155.8 169.0 -8% Electric Lighting and Fittings 10.1 8.7 17% 9.1 12% 27.1 23.6 15% Total Revenue 60.9 61.3 -1% 69.5 -12% 182.9 192.7 -5% PBT Segmentation Investment Holding 4.1 4.0 2% 4.1 0% 12.2 11.2 9% Cable Support Systems 9.0 10.0 -10% 14.8 -39% 30.8 41.7 -26% Electric Lighting and Fittings -0.7 1.2 -153% 0.4 -268% 0.3 0.7 -50% Elimination -4.4 -4.4 0% -4.4 0% -13.1 -12.0 9%

Source: Kenanga Research - 21 Nov 2024