BY TEE LIN SAY
THE country's largest ductile pipe producer YLI Holdings Bhd may not fall under the coverage of most research houses, but some dealers privately contend that this stock has good potential which sadly is not reflected in its share price.
“The only problem with buying these shares is that the counter is rather illiquid. You may have to wait for long periods before you are able to either buy or dispose of these shares,” says an analyst from a foreign research house.
Nevertheless, its liquidity woes might soon be resolved. The board has proposed a bonus issue of up to 32.946 million shares on the basis of one bonus share for every two shares held.
“This exercise is expected to be completed in 4-5 months' time, and should narrow the liquidity discount. The board is also recommending a special dividend of 7.5 per cent less tax,” says the analyst.
For the cumulative three quarters ended Dec 31, 2002, YLI posted a 28.46 per cent increase in cumulative turnover to RM95.7 million from RM74.50 million for the same period last year. Net profits also increased from RM16.41 million to RM21.95.
The strong performance of the first nine months of the current fiscal year was attributed to record-breaking sales achieved by the group. The group managed to sell more than 30,000 tonnes of ductile iron pipes in the nine-month period, compared to a similar amount sold for the entire 2002 fiscal year.
YLI has been supplying about 20 per cent of the ductile pipes used by local water authorities and the country.
Currently, Negri Sembilan and Selangor are upgrading their water supply systems, which includes replacing old pipe networks to reduce non-revenue water. The water project in Selangor is estimated to be in excess of RM2 billion over the next five years.
The federal government has placed water supply as a top priority and is expected to spend at least RM50 billion until the year 2050 under the Water Resources Masterplan to modernise the country's water supply. The plan includes building 47 dams, larger treatment plants and inter-state water transfer.
The company will spend RM4 million to 5 million to increase the melting capacity from 50,000 tonnes to 75,000 tonnes.
Also, under the 8th Malaysian Plan, the budget for water supply will increase from RM2.8 billion to RM4.0 billion.
“About 50 per cent of the total value, or RM2 billion, constitutes the cost of pipes. Based on this estimate, there would be an annual RM400 million spending for pipes for 2001-2005,” says an analyst from CIMB Research.
YLI, however, feels that the numbers might be a little aggressive. A more realistic plan would be a RM2.5 billion budget to replace the old asbestos cement (AC) pipes over the next 10-13 years.
CIMB Research reports that should ductile iron pipes manage to double its market share to 20 per cent in replacing the AC pipes, the additional sales are RM50 million per annum. YLI will likely capture the bulk of the sales for ductile iron pipes.
The additional RM25 million to 50 million per annum in sales value from pipe replacement is equivalent to 20 per cent to 40 per cent of its estimated financial year 2003 revenue of RM125 million.
The group is also preparing for China's entry in the World Trade Organisation (WTO) and trading in a more liberalised economy.
YLI group managing director Loh Yok Yeong says that one of YLI's business plans for WTO would be to increase its export business from the current 5 per cent to 20 per cent.
Due to the anticipated improvement in liquidity from the impending bonus issue and YLI's excellent fundamentals, CIMB is re-rating the stock.
“With a strong projected 3-year earnings per share compounded annual growth rate of 33.7 per cent, return of equities of more than 20 per cent and strong support from a pipe replacement project, we rate YLI an outperform,” says CIMB Research.
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