Unitrade optimistic about further profit growth post-ipo

UNITRADE Industries Bhd, one of the country’s largest building materials wholesalers and distributors, is confident of continuing to register profit growth despite headwinds impacting a myriad of industries.

This is because the group believes that the post-pandemic economic recovery is leading to increased construction activities and higher demand for building materials.

Managing director Nomis Sim Siang Leng also says the group is shifting its product mix, moving from volume-oriented to more margin-oriented ones.

“Our plan is to improve on the margins, to improve profitability. Costs continue to go up. If your margins stay stagnant or come down, then it’s very hard to sustain the business,” he tells Starbizweek.

Unitrade, en route for a listing on the ACE Market on June 14, 2022 at a unit price of 32 sen, will have an enlarged share capital totalling 1.56 billion shares.

Upon listing, the group will have a market capitalisation of Rm500mil and is set to become the largest listing on the ACE Market since the market’s inception in 2009.

Founded in 1979, Unitrade carries more than 6,000 stock-keeping units of pipes, valves, fittings and accessories for mechanical and electrical (M&E) works, as well as steel products and other building materials for civil works.

It operates out of its warehouse in Shah Alam, Selangor, and serves 1,232 active customers nationwide including M&E contractors, building contractors, traders, manufacturers and retailers.

The group also manufactures and sells pre-insulated pipes primarily used to transport and maintain the temperature of fluids in the pipes in underground or above-ground piping systems. The manufacturing activity takes place in its factory and is transported as complete systems to project sites.

Unitrade also provides rental of temporary structural support equipment such as scaffolding, steel plates and hollow sections.

For the past three financial years ended March 31 (financial year 2019 or FY19 to FY21), almost 97% of revenue came from wholesale and distribution, and 2% from the manufacturing and sales of pre-insulated pipes while the balance from rental of temporary structural support equipment.

For FY21, revenue dropped 5% year-onyear to Rm1.02bil while net profit jumped nearly 51% to a historic high of Rm28.8mil.

The group noted that in FY21, pandemic-related movement restrictions had resulted in lower sales volume but this was cushioned by rising steel prices, which increased the selling prices of its goods, and there was higher gross profit generated.

“Our products are mainly steel-based. We benefited because for this round, the rising steel prices were sustained. So we managed to ride that wave and improve our profitability,” says Nomis.

The plan now is to offer more specialised products such as high pressure hoses.

“It would be nice to build on specialised products, where we have exclusivity. We are also looking at bringing in premium products that are not in the local market yet,” he says.

Meanwhile, the expected Rm100mil proceeds from the listing are due to be utilised for working capital (50.5%), repayment of bank borrowings (39.8%), capital expenditure for a pipe fabrication centre (5%) and estimated listing expenses (4.7%).

The group recently relocated all its operations to a new headquarters in Bukit Jelutong, Shah Alam, to enhance operational efficiency. “Previously, we were operating from five different locations,” says Nomis.

The group’s prospectus also pointed out that in terms of gearing, Unitrade’s business depends on the availability of working capital to acquire and maintain sufficient inventory to fulfill sales orders in a timely manner.

The nature of a wholesaler and distribution business as well as the capital expenditure incurred for its new industrial complex have resulted in the group’s gearing level of between 1.7 to 2.4 times.

This will, however, improve to around one time post-listing. Unitrade also plans to provide value-added services for pipes by setting up a pipe fabrication centre that offers end-to-end pipe services.

“We are not aware that anybody else in the market has a pipe fabrication centre that provides end-to-end pipe services. Hhopefully this will translate to higher competitiveness and improved profit margins for our customers.

“We target to get this up and running within the next 12 months,” says Nomis.

He points out that Unitrade has varying levels of supply participation for many construction projects as well as post-construction building services and maintenance.

“Our participation can range from supplying to the main contractor to the firefighting specialists, to the plumbing and for the heating, ventilation and air conditioning.

“If we are lucky, we supply to all aspects of the project. It’s fair to say that in most projects, we have some participation, especially the bigger ones,” he says.

He says the group’s biggest strength is its huge range of products and being a comprehensive solutions centre, where customers can get everything they need.

“Our plan is to improve on the margins, to improve profitability. Costs continue to go up. If your margins stay stagnant or come down, then it’s very hard to sustain the business.”

Nomis Sim Siang Leng

Nomis also points out that the group has many long-standing customers. “You can go to other shops and buy but the trust and reliability is not always the same. When prices fluctuate, some suppliers will not honour the

order. This is something that we have never done,” he says.

Regarding Malaysia’s property sector, Nomis believes there may be a slowdown in the construction of residential high-rise buildings due to oversupply.

“Whereas for the industrial sector, I think there’s very strong demand if you look at Penang and Kulim, Kedah, where a lot of high technology companies are still investing heavily,” he says.

He is optimistic about mega infrastructure projects in the country such as the Mass Rapid Transit 3 (MRT3) Circle Line project, which is estimated to cost around Rm31bil.

“We are actually in the heart of such projects as the reinforcement bar is one of our core products,” says Nomis.

However, he is also cautious about nearterm challenges arising from macroeconomic factors such as rising interest rates, high material prices and a potential slowdown in China’s economic growth.

Nomis points out that a drop in consumer demand due to lockdowns in the world’s second-largest economy would affect global demand.

“Also, the current challenges are financial – interest rates are very uncertain. Prices are at very high levels at the moment – whether these can be absorbed by the contractors.

“This will lead to a slightly increased business risk. So we need to tighten our credit control system even further to avoid credit risk,” he says.

Nomis adds that operating costs will increase in the coming months with the minimum wage hike and record high prices for building materials.

“One way we manage this is our business is spread throughout industries, throughout different types of customers and different segments,” he says.

Regarding global supply chain disruptions and shipping delays, Nomis says the group is not affected as it carries ample stock, especially for those with long lead time, although the delivery time has increased.

“Typically, you would expect delivery time to be 60 to 90 days. But now it might be 120 to 150 days or 180 days even, but our stock is sufficient to last us until they are replenished.

“Alternatively, we also have a network of friendly parties and stockists that we can buy from to mitigate any shortfall until new stock arrives. So that has not affected us,” he says.

Based on information in its prospectus, a report by Smith Zander International Sdn Bhd notes that Unitrade has a 1.2% market share in the building materials industry in Malaysia.

For the eight-month financial period ended November 2021, revenue jumped 33.2% yearon-year to Rm756.4mil while net profit increased 103% to Rm28.1mil.

Unitrade is listing at a price-earnings (PE) multiple of 11.9 times based on a net earnings per share of 2.7 sen for the eight-month financial period ended November 2021 but extrapolated to 12 months, based on information on its prospectus.

Unitrade’s dividend policy is to distribute dividends of up to 30% of its annual net profit.

Meanwhile, in a note published yesterday, RHB Investment Bank Research notes that Unitrade’s future earnings will be anchored by its enhanced warehousing capacity, thus enabling the group to supply more projects simultaneously.

“Demand for building materials may be underpinned by increased piping works and better construction activity due to MRT3 contract rollouts,” says the research unit.

RHB Research is projecting a five-year earnings compound annual growth rate of 19.8% for Unitrade, largely in tandem with better product mix and demand.

The research unit says the group’s pipe fabrication centre and bigger warehouse can allow for the catering of more products to customers, and as such, gross margins are estimated to stay at 8% to 9% in FY22 to FY24.

Sales costs are managed by keeping inventory of other products that are of higher margins, such as pipes, valves and fittings – these are under the mechanical and engineering segment.

The group also does not keep stock its lower-margin items such as reinforcement steel under the civil works segment – most are purchased on a back-to-back basis with the sales department.

“Therefore, Unitrade is not significantly exposed to the risk of steel price fluctuations for lower-margin products,” says RHB Research.

Also, Unitrade’s top five customers only make up 14.9% of total FY21 revenue, which means the group faces a low customer concentration risk.

Revenue sustainability is deemed commendable, as its products cater for the full lifecycle of buildings and infrastructure, ranging from construction, refurbishment, retrofitting to repair and maintenance.

Meanwhile, the group’s long-standing relationship with its major suppliers has enabled better purchasing and cost efficiencies – one of its largest suppliers has been dealing with Unitrade for 13 years.

At the same time, the group is not reliant on any single original equipment manufacturer to manufacture its in-house Alfran and S2S branded products.

“As such, risk of delivery delays can be minimised, helping to maintain customers’ trust

in Unitrade’s abilities in executing orders,” says RHB Research, which ascribes a fair value of 33 sen on Unitrade’s stock, based on a target 12 times FY23 estimated PE.

The research unit says its target PE of 12 times is derived by applying a 20% small-cap discount on Bursa Malaysia Construction Index’s three-year average PE of 15 times – it is below the peers’ historical five-year average PE range of 12.7 to 21.4 times.

The key risks to Unitrade’s business include fluctuations in the price of steel products, intense competition and disruption of supply from suppliers.