United U-LI Berhad Integrated Cable Support System Manufacturer

Transcription

1 30 June 2017 Initiate Coverage United U-LI Berhad Integrated Cable Support System Manufacturer Initiate with BUY Target Price (TP): RM4.88 INVESTMENT HIGHLIGHTS Integrated facilities with higher capacity Export markets to boost sales Undisrupted earnings growth for the past four years Initiate with BUY and TP of RM4.88 Business Overview: United U-LI Corporation Bhd (U-LI) manufactures cable support systems as well as electrical lighting and fitting systems. Its products are used in various sectors including construction, telecommunication, power, water works, transportation and oil and gas. The company was established in 1978 and was listed on Bursa in Investment Theses: 1. Integrated facilities with higher capacity. U-LI operates four plants in Seri Kembangan, Ipoh and Nilai. Its new plant in Nilai can potentially double the group s total production capacity to between 50,000 and 60,000 tonnes per annum by 2018 as it installs the machineries progressively. 2. Export markets to boost sales further. Exports currently make up 20% of its sales but management targets to improve that to at least 30% in the next two years. Countries which the Company are aiming for export market include Australia and some of the Southeast Asian countries like Myanmar. 3. Undisrupted earnings growth for the past four years. The Company s net profit has increased by 87.6% from FY13-FY16. Note that its gross profit margin improved from 35.3% to 40.9% over these periods. That is also premised on FY13-FY16 revenue, which has jumped by 30% over the period. The growth in sales shows robust demand for U-LI s products. We expect the demand to remain strong in view of the booming construction activities. 4. Net cash and decent dividend payout. U-LI was in a net cash position for the past six years. The dividend payout from the company ranged from 23% to 63% during the period. We expect DPS of 12 sen in both FY17F and FY18F given the company s strong operating cashflow. Initiate with BUY and TP of RM4.88. The TP of RM4.88 is derived from 15x PE on FY18F EPS of sen. The PER of 15x is in-line with U-LI s 5-year historical mean PE. There are no other listed direct competitors on Bursa. We like U-LI for its growth potential from both local and overseas markets, net cash position, strong cash flow and decent dividends. RETURN STATS Price (29 th June 2017) Fair Value Expected Share Price Return RM4.27 RM % Expected Dividend Yield 2.81% Expected Total Return STOCK INFO 17.03% KLCI 1, Bursa / Bloomberg Board / Sector Syariah Compliant 7133/ UULI MK Main/ Industrial Products No Issued shares (m) Market cap. (RM m) Price over NA wk price Range RM3.36-RM6.72 Beta (against KLCI) 0.66x 3-mth Avg Daily Vol mth Avg Daily Value 0.33 Major Shareholders (%) Pearl Deal (M) Sdn Bhd RHB Asset Management Kumpulan Wang Persaraan 3.23 Price Performance (%) Absolute Relative 1 month months months is a unit of MIDF AMANAH INVESTMENT BANK Kindly refer to the last page of this publication for important disclosures

2 2 INVESTMENT STATISTICS FYE Dec FY14 FY15 FY16 FY17F FY18F Revenue (RM m) Pretax Profit (RM m) Net Profit (RM m) EPS (sen) EPS growth (%) PER (x) Net Dividend (sen) Dividend yield (%) Gearing (x) ROE (%) ROA (%) NTA per share (RM) Price to NTA (x) Source: Company, MIDF Research DAILY PRICE CHART Source: Bloomberg Ng Bei Shan

3 3 A. KEY INVESTMENT THESES Modernising integrated facilities further. U-LI s in-house capabilities include roll forming, spot welding, shearing, slitting and powder coating. The in-house processes enable U-LI to achieve operational efficiency and cost reduction. As the company further integrate and automise its manufacturing processes, we expect margin improvement. The company has automated many of the labour-intensive processes and is committed in modernising the processes even more. For instance, it uses industrial robots in the welding process, which is able to achieve higher accuracy and reduce wastage. The automated processes also allow U-LI to be less labour intensive. Capacity can easily double with Nilai plant. Before the completion of the Nilai plant, U-LI operates mainly from its Seri Kembangan facilities, which have an estimated capacity of 20,000 to 30,000 tonnes per annum. The Nilai plant is still not fully utilised and there is room to add more machines due to the bigger land size. That said, the Nilai plant has only started operations earlier this year so it is still early to determine the maximum capacity of the Nilai plant. To put things into perspective, the Seri Kembangan land is 4.2 acre compared to the Nilai factory, which sits on a 9-acre land. Capturing more sales from previous lost orders. U-LI s old facilities faced bottleneck as the plants reached their maximum capacity. On top of that, its third party galvanisers were also facing bottleneck at that time. These reasons led to loss in sales opportunities. With the new capacity from the Nilai new plant, U-LI should be able to re-capture sales and the market requirement. We note that the Nilai plant is ramping up fast and management plans to add more machines in the months to come. Healthy pipeline of mega-projects in the country to support demand growth. As cables and electrical components are essential parts of a building, U-LI stands to benefit from the slew of construction projects such as Merdeka PNB 118, Tun Razak Exchange, LRT Extension and MRT Line 2 and 3. On top of infrastructure projects, U-LI s products are also used for residential properties. Besides new projects, U-LI s products are also used for the renovation and replacement market. Exhibit 1: U-LI could benefit from some of the upcoming construction projects Merdeka PNB 118 Tun Razak Exchange development LRT Extension MRT Line 2 and 3 Export markets to boost sales further. Currently, U-LI exports about 15% of its products, most of which is to Singapore. With the additional capacity from the new plant, the company can reboot its export sales plans. Previously, it has exported to countries like the Middle East. Other potential export markets are Australia and Southeast Asian countries. As the current production capacity is still mainly for the Malaysian market, management works towards increasing export sales gradually once the operation at the new plant stabilises. In the next few years, management targets for export to contribute 35% to its sales. Notably, its selling and distribution costs had increased by 19.7% to RM10.5m FY16 from RM8.8m in FY15 as it enlarge its market reach. Improving margins to drive up earnings. U-LI s profit margin has improved from 10.75% in FY13 to 15.48% in FY16, representing an improvement of 4.73ppt. The better margin can largely be attributed to economies of scale and better operational efficiency. Management has also improved on its maintenance scheduling and switched to better quality consumable material to improve its operational efficiency, which are results of the modernisation of its faculties. Reduction in wastage and downtime have largely aided in the better margins. Due to the improving margins, U-LI s bottomline is expected to expand in-line with the growth of its topline.

4 4 Sizeable landbank to support future expansion. U-LI owns another two parcels of vacant industrial land totalling 19 acres in the vicinity of the existing Nilai plant. The 11-acre plot is adjacent to the existing factory and the 8-acre parcel is also nearby. The leasehold land was bought for RM12m and RM23m each. Although the company has just expanded the new Nilai plant, there is a possibility that it will be able to ramp up the utilisation rate very quickly. Its overseas market expansion plans will also allow for it to bring in more sales and increase the need for extra capacity. U-LI s landbank will allow for it to expand seamlessly when the need for more space arises. Exhibit 2: U-LI s industrial landbank is close to its existing Nilai plant Source: Company, Google Maps

5 5 B. FINANCIAL HIGHLIGHTS Seven years of uninterrupted sales growth. Notably, its revenue breached RM200m for the first time in FY16. We believe U-LI will be able to enjoy perks of having economies of scale as it expands its production capacity further. We believe that sales growth will continue in FY17F and FY18F due to the healthy demand for cable support system, higher production capacity and export sales expansion plans. Following which, we expect sales to grow by 10.8% in FY17F and 21.7% in FY18F as the Nilai plant moves towards its optimal capacity. Exhibit 3: U-LI s revenue and profit trend RM m % FY14 FY15 FY16 FY17F FY18F Source: Company, MIDF Research Revenue Net profit Profit margin Nilai plant to contribute to FY17F and FY18F profit growth. We expect earnings to grow in tandem with the revenue expansion. However, we note that quantum of earnings growth in FY17F will not be as much as its topline growth due to high start-up cost for the new factory but that should normalise in FY18. Hence, we expect earnings growth of 9% in FY17F and 39% in FY18F. Better profit margin to buffer any potential spike in costs. U-LI s profit margin has improved from 10.75% in FY13 to 15.48% in FY16, representing an improvement of 4.73ppt. The above 10% profit margin will help it buffer any surge in input costs or operating costs. We also note that the better margins over the past few years can be largely attributed to economies of scale and better operational efficiency. We expect profit margins at 15.2% in FY17F and 17.4% in FY18F as the management reaps the benefits of higher production capacity and better efficiency of the Nilai plant. Strong net cash position. U-LI has been in a net cash position from FY11 to FY16, ranging from RM9.32m to RM30m. Its cash and cash equivalent also grew healthily from RM52.1m in FY11 to RM83.1m in FY16. We expect the net cash position to continue into FY17F and FY18F due to its strong cash flow while some of the expenses for the Nilai plant could have been capitalised in FY16.

6 6 Strong operating cash flow and dividends. U-LI s operating cash flow range from RM22.6m to RM34.9m from FY13 to FY16. We expect its operating cashflow to remain strong in FY17F and FY18F due to the resilient demand for its products. Its strong operating cashflow will also allow for it to continue its dividend payment. From FY13 to FY16, the company paid out dividends that range from 29.8% to 63% of its net profit. Assuming payout ratios of 51.4% in FY17F and 36.9% in FY18, we expect DPS to be 12 sen for the next two years. That will translate into dividend yield of 2.8%. We anticipate for U-LI to balance between paying out dividends and reserving some cash for future expansion plans. Exhibit 4: U-LI s dividend payout % % % % 30.0% DPS Payout ratio Sturdy 4.0 balance sheet for future growth % 10.0% 0.0 FY14 FY15 FY16 FY17F FY18F 0.0% Source: Company, MIDF Research C. INDUSTRY OUTLOOK One of the bigger cable support systems company in the region. U-LI is the only listed cable support systems company in Malaysia with a leading position in the segment. In Asia, one the biggest players include Japanese firm Negurosu Denko Co Ltd while globally there is Legrand from France. In Southeast Asia, U-LI is considerably one of the bigger cable support systems manufacturers, implying that its products are well-received. Country s continuous development a boon. U-LI s products are used in infrastructure projects, industrial projects as well as residential projects. Among others, the Mass Rapid Transit 2 and extension of the Light Rail Transit are expected to support the demand for cable management systems. Other mega projects such as the Tun Razak Exchange development, Merdeka PNB 118, Kwasa Damansara and Petronas Refinery and Petrochemical Integrated Development project will also contribute to the demand for cable support products. Other than that, private commercial and residential projects as well as public housing projects under the Government s initiatives to push for affordable housing will further strengthen the demand for cable support systems. The estimated compiled value of construction jobs highlighted in Budget 2017 amounted to RM99b whereas the rail projects amounted to RM39b.

7 7 Cable support system and electrical fitting divisions registered double digit growth yoy for the past three years. The sales for cable support systems had been growing more than 10% on year since FY14, showing resilience in demand for the products. Cable support systems typically make up more than 80% of the group s sales while the remaining comes from electrical fitting products. Exhibit 5: U-LI s revenue growth by segment 30.0% 25.0% 20.0% 15.0% 10.0% yoy growth for cable yoy growth for electrical 5.0% 0.0% FY14 FY15 FY16 FY17F FY18F Source: Company, MIDF Research D. VALUATION Initiate with BUY and TP of RM4.88. We derive our TP of RM4.88 by ascribing 15x PER to U-LI s FY18F EPS of sen. The PER is in-line with U-LI s 5-year historical mean PE of 14.8x. There are no other listed direct competitors on Bursa. We like U-LI for its net cash, strong cash flow and decent dividend and potential for growth with its enlarged production capacity. We expect U-LI to continue its growth in FY17F and FY18F due to the extra capacity from the new Nilai plant to meet higher demand from the growth in the construction sector. U-LI owns 19 acres of vacant land in the vicinity of its current plant, which provides room for future expansion. E. RISKS Delays in huge projects will lead to a backlog of orders for U-LI, which will in turn push back its sales and earnings. While such risks exist, we note that a number of the recent infrastructure projects are now carried out through the project delivery partner (PDP) concept, which will reduce the risks of project execution. Inability to resolve operational issues. U-LI s production capacity will be affected if the company is unable to resolve its operational issues such as the bottleneck that arose due to third party galvanisers inability to fulfil its requirements. As the Nilai plant has just started, it will take some time until the plant can reach an optimum utilisation rate during which, we do not discount the possibility of operational risks as new machines are brought in. That said, we believe that the management will be able to resolve these issues given their track record and company history of close to four decades. Labour problems. The company hires foreign workers for some of its manufacturing processes. We estimate that the company currently employs a few hundred of foreign workers so any shortage of foreign labour or change in policy could adversely impact their operations.

8 Income Statement (RM m) F 2018F Balance Sheet (RM m) F 2018F Revenue PPE Operating Profit Others Profit Before tax Non-current Asset Tax expense Inventories Net Profit Receivables Earnings per share (sen) Others Dividend per share (sen) Cash and cash equivalent PER (x) Current Asset TOTAL ASSETS Cash Flow Statement (RM m) F 2018F Share capital Pre-tax profit Share premium Depreciation Retained profits Finance cost TOTAL EQUITY Others Borrowings OP before in WC Others in inventory Non-current liabilities in receivables Payables in payables Borrowings Others Others Tax Current liabilities Cash from Operations TOTAL LIABILITIES Purchase of PPE Ratios F 2018F Others Profitability ratios (%) Cash from Investment Return on Equity Return on Assets Net Borrowings Liquidity ratios (x) Others Current ratio Dividends Quick ratio Cash from Financing Debt-to-equity Net debt-to-equity Net cash Net cash Net cash Net cash Net cash in cash Profit margin (%) Beginning cash Gross profit margin 37.25% 38.50% 40.86% 39.73% 42.62% Ending Cash Net profit margin 13.48% 14.51% 15.48% 15.22% 17.42% Source: Company, MIDF Research 8

9 9 APPENDIX I. Major Corporate Milestones 1978 U-Lee Trading Company was set up to trade cable support system as well as providing engineering works Conversion of the trading company into United U-LI (M) Sdn Bhd (ULSB) as the business expanded. Current core activities are manufacturing and dealing in cable support systems and related industrial metal products Establishment of United U-LI Steel Service Centre Sdn Bhd (ULSS) to complement ULSB s core activities. ULSS provides slitting and shearing services as well as trade industrial hardware Establishment of Cable-Tray Industries (M) Sdn Bhd (CTSB) to complement ULSB s core activities. Involved in all types of cable trunking and related industrial metal products ULSB ventured into manufacturing of integrated ceiling systems ULSB ventured into the production of steel roof battens. February 2002 Formation of U-LI Group through the acquisition of ULSB, ULSS, CTSB and Gabung Mekar Sdn Bhd. 23 April 2002 U-LI Corporation Bhd was listed on the then Second Board of Kuala Lumpur Stock Exchange United U-LI Building Material Sdn Bhd was set up. It mainly manufactures and sells integrated ceiling systems, steel roof battens and building materials ULSB acquired United U-Li Goodlite Sdn Bhd which manufactures light fitting systems Commencement of Nilai Plant. Source: Company, MIDF Research

10 10 II. Corporate Structure United-ULI Corporation Bhd United U-Li (M) Sdn Bhd United U-LI Building Material Sdn Bhd United U-LI Steel Service Centre Sdn Bhd Cable-Tray Indsutries (M) Sdn Bhd United U-LI Goodlite Sdn Bhd Gabung Mekar Sdn Bhd United U-LI Goodlite Marketing Sdn Bhd Source: Company III. Management Profile TAN SRI DATO WIRA ABD RAHMAN BIN ISMAIL Independent Non- Executive Director (Chairman) Age 88, Male, Malaysian TAN SRI DATO WIRA LEE YOON WAH Group Managing Director/Chief Executive Officer Age 58, Male, Malaysian Tan Sri Dato Wira Abd Rahman Bin Ismail was appointed to the Board on 21 February He is also the Chairman of the Nomination Committee and Remuneration Committee. He completed his secondary education at Sultan Abdul Hamid College, Alor Star, Kedah Darul Aman in He served in the Royal Malaysian Police Force since 1950, holding various posts until 1985 when he retired as the Deputy Inspector General of Police. During his tenure of service, he represented Malaysia in various Interpol and drug enforcement/conferences/seminars/committees at international and regional levels. From 1979 to 1982, he was elected as an executive Committee Member of Interpol and was subsequently elected as Vice President of Interpol from 1984 up to He tendered his resignation due to his retirement from the Royal Malaysian Police Force. He sits on the Board of all subsidiary companies of the group. He also sits on the Board of several private limited companies. Tan Sri Dato Wira Lee Yoon Wah, is the Group Managing Director/Chief Executive Officer of ULC. He was appointed to the Board on 21 February He is a member of the Remuneration Committee. He completed his secondary education in 1975 and is one of the founding members of the ULC Group. Presently, he is in charge of the overall management and growth of the Group. He has more than 20 years working experience in the electrical industry. He is credited for charting the growth of the Group since its inception from a small operation to an industrial concern as it is today. As the driving force behind the Group s growth, he is also responsible for the overall business development, strategic planning as well as the business and corporate development of the Group. He also sits on the Board of all the subsidiary companies of the Group. He is the brother to Dato Lee Yoon Kong.

11 11 DATO LEE YOON KONG Executive Director Age 57, Male, Malaysian TEOW LAI SENG Executive Director Age 55, Male, Malaysian CHIM WAI KHUAN Independent Non- Executive Director Age 66, Male, Malaysian WONG CHOW LAN Independent Non- Executive Director Age 55, Female, Malaysian LOKMAN BIN MANSOR Independent Non- Executive Director Age 57, Male, Malaysian SHARIFF BIN MOHD SHAH Senior Independent Non-Executive Director Age 68, Male, Malaysian Dato Lee Yoon Kong was appointed to the Board on 21 February He is one of the founder members of the ULC Group. He holds a Diploma in Electrical Engineering. Prior to joining United U-LI (M) Sdn Bhd, a subsidiary company of ULC, he was the electronics Technician with Amateur Photo Store Sdn Bhd, the locally appointed agent for AKAI products, from 1979 to He has more than 20 years working experience in the electrical industry and has contributed significantly towards the growth of the Group. Presently, he is responsible for the technical, production and manufacturing functions of the Group. He also sits on the Board of all the subsidiary companies of the Group. He is the brother to Tan Sri Dato Wira Lee Yoon Wah. Teow Lai Seng, was appointed to the Board on 21 February He has more than 20 years working experience in the electrical industry. He holds a Diploma in Electronics Engineering and was the Technical and Service Technician with Amateur Photo Store Sdn. Bhd. Prior to joining ULSB as a Factory Supervisor in He was subsequently promoted to Factory Manager in 1990 and is responsible for the overall management and production operations of the factory. He also sits on the Board of certain subsidiary companies of the Group. Chim Wai Khuan was appointed to the Board on 21 February He is the Chairman of the Audit Committee and a member of the Nomination Committee and Remuneration Committee. He is an accountant by training and is currently a member of the Malaysian Institute of Accountants. He has vast experience in the areas of accounting, audit, tax and corporate secretarial and consultancy matters, having served in various capacities both in the United Kingdom and in Malaysia from 1975 to Currently, he is practicing as a Corporate and Management Consultant and also manages his own audit practice under the name of WKC & Co. He also sits on the Board of several private limited companies. Wong Chow Lan was appointed to the Board on 11 April She is a member of the Nomination Committee, Remuneration Committee and Audit Committee. She is a qualified Chartered Secretary of the Institute of Chartered Secretaries and Administrators since 1992 and an associate member of The Malaysian Association of The Institute of Chartered Secretaries and Administrators. Currently, she is attached to a consultancy firm. She also sits on the Board of several private limited companies. Lokman Bin Mansor was appointed to the Board on 21 February He is a member of the Audit Committee. He graduated with a Bachelor of Architecture from Adelaide University, Australia in From 1981 to 1982, he was attached with CSL & Associates in the capacity of Architectural Assistant. In 1984, he joined Pakatan Reka Architects as an Assistant Architect before taking up a lecturing position with Institut Teknologi Mara in From 1987 to 1991, he was appointed as a Director of Binateras-DeG Arkitek Sdn. Bhd. He has gained vast experience in the area of development and project management in implementation of projects and is also well versed in the various aspects related to property investment, financing and market assessment. Shariff Bin Mohd Shah was appointed to the Board on 1 October He graduated with a Bachelor of Economics (Hons) from University of Malaya in Upon graduation he joined the Administrative and Diplomatic Service (PTD) and posted to the Government Staff Training Centre and then to the Ministry of Foreign Affairs. He left government service in 1975 to join Borneo Company (1975) Sdn Bhd as Marketing Executive until He was Marketing Director of the National Livestock Development Corporation between 1978 until He took up appointment as Manager, Guthrie Malaysia Trading Corporation in 1983 and was the Senior General Manager of the company when he left in He has wide experience in international trading and marketing.

12 12 CHOONG CHEE YEONG Group Financial Controller Age 43, Male, Malaysian MOHD HANIFF HASHIM General Manager, Corporate Affairs/HR Age 56, Male, Malaysian HO CHIEN LOON Business Development Manager Age 37, Male, Malaysian LEE YOOK CHOO Group Procurement Manager Age 55, Female, Malaysian Choong Chee Yeong joined the company in May He is a member of the Malaysian Institute of Accountants. He started his career as an Audit Executive in a medium-sized audit firm before joining a light fittings manufacturer as an Assistant Accountant in June 2002 and was promoted to Accountant a year later. He has been the Group Financial Controller of United U-Li group of companies since He is also a member of the Risk Management Committee Mohd Haniff Hashim joined the company in March He graduated with a Bachelor of Science in Industrial Chemistry from University of New South Wales, Sydney in Prior to joining U-LI, he had served in various senior management positions with the ICI Group of companies in Malaysia and Singapore. He is responsible for the corporate and management functions and human resource matters of the Group. He is also a member of the Risk Management, Safety and ISO committees. Ho Chien Loon joined the company in July 2000 as Production Executive. He was appointed Technical Sales Executive in 2006 and promoted to his current role in January He completed his Diploma in Automotive Engineering from Federal Institute of Technology in Lee Yook Choo joined the company in March Prior to that she has accumulated more than 20 years of experience working with a local glass manufacturer and a steel producer. She holds a Diploma in Secretarial Studies from Stamford College. Source: Company

13 13 is part of MIDF Amanah Investment Bank Berhad ( X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad) DISCLOSURES AND DISCLAIMER This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X) pursuant to the Mid and Small Cap Research Scheme ( MidS ) administered by Bursa Malaysia Berhad. This report has been produced independent of any influence from Bursa Malaysia Berhad or the subject company. Bursa Malaysia Berhad and its group of companies disclaim any and all liability, howsoever arising, out of or in relation to the administration of MidS and/or this report. It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose. MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS STOCK RECOMMENDATIONS BUY TRADING BUY NEUTRAL SELL TRADING SELL Total return is expected to be >15% over the next 12 months. Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been assigned due to positive newsflow. Total return is expected to be between -15% and +15% over the next 12 months. Total return is expected to be <-15% over the next 12 months. Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been assigned due to negative newsflow. SECTOR RECOMMENDATIONS POSITIVE NEUTRAL NEGATIVE The sector is expected to outperform the overall market over the next 12 months. The sector is to perform in line with the overall market over the next 12 months. The sector is expected to underperform the overall market over the next 12 months.