PETALING JAYA: United U-Li Corp Bhd’s dominance in the fragmented cable support systems (CSS) space will likely strengthen, as smallish competitors crumble under the pandemic pressure.
In the current health crisis, the cable support systems manufacturer is expected to benefit as its competitors, which are mostly smaller in size, face difficulties in fulfilling orders due to cash-flow constraints arising from the prolonged lockdowns, as well as inability to secure raw materials due to the worldwide shortage.
Being a dominant player, this provides United U-Li the opportunity to increase its market share and command pricing power, translating to strong and stable margins, said Kenanga Research. The brokerage noted that United U-Li had deferred its capacity expansion plans as construction progress had been affected by the ongoing lockdown.
“United U-Li’s initial plans to construct a new factory and hostel (with capital expenditure of RM20mil) in Nilai is deferred till next year amid the uncertainties arising from the pandemic,” Kenanga Research wrote, noting the company had planned for the new factory to be completed by the third quarter (Q3) of the financial year ending Dec 31, 2022 (FY22) but its plans had been stymied by the full lockdown imposed in June. Currently, it said, only earthworks had been done on the site.
Consequently, Kenanga Research reduced its forecast earnings for United U-Li by 8% for FY22 after stripping off the anticipated capacity expansion imputed.
The brokerage reiterated its “outperform” call on United U-Li, with a lower target price of RM1.85, compared with RM2 previously. This was based on 10 times the estimated earnings for FY22. It said the sales momentum for United U-Li would likely pick up, with orders having started trickling in since the re-opening of the construction and electrical and electronic sectors on Aug 16.
United U-Li posted a net profit of RM9.38mil in Q2 of FY21, compared with a net loss of RM4.4mil in Q2 of FY20, while revenue more than doubled to RM41.92mil from RM17.2mil. The company attributed its improved bottom line to the better margins achieved.