|Current Price||RM 3.34
|Target Price||RM 3.70
|Market Cap||RM 658.6m (as of 15/04/17)|
One of the leading stationery products manufacturers with high exposure to the European market. Offers its products under the brand names such as ABBA, Premier and Profile.
1) Frexit is a potential risk
On-going discussion of Frexit and current situation post-Brexit will weaken Asia File’s attractiveness given its close to 70% exposure to European markets. Frexit will have a much more detrimental effect as it is described as ‘could be worse than Lehman Brothers’. However, many research institutions such as Raiffeisen, CIBC and JP Morgan rates the probability as very low. And stationery products demand is expect to be supported by the improvement in literacy levels in most countries.
2) Greater risk of a shift in consumer preference due to technological advancements.
Recently, Amanah Saham Bumiputera has been disposing of shares. It is obviously an adverse signal to the market. However, the amount is relatively small. Based on our calculation, the disposed amount to date is only 0.4% of their total holdings.
3) Losing support from a significant shareholder
On average, the fund from operations margin fluctuating between 8% to 10% which is deemed acceptable, but net operating and free cash flow are relatively more volatile. We are projecting the capex to be around 4% to 3.5% of the sales in the near term.
4) Current valuation does not consider for new products though it is likely to have a positive impact on the business
Management publicly stated their intention to diversify into new products (such as metal-based and plastic-based). We did not project it into our valuation given the uncertainty surrounding the estimation of profit margins and demand.
5) Well-positioned to weather the storm with its high liquidity and comfortable leverage
On the positive aspect, Asia File’s liquidity is strong as reflected by a quick ratio of 3.4x, underpinned by net cash position of RM91.8mil. Sustainable capital structure with Debt/EBITDA comfortable at 0.49x and high debt-servicing capability.
6) Initiate with a Neutral rating
We have valued the company using DCF (WACC: 9.8%, TG: 3%) and initiate the stock with a target price of RM 3.70 reflecting an upside potential of 10.8%. Its current P/E is trading at over 50% discount to the Bursa Malaysia Small Cap Index average, though we do not see any re-rating in short to medium terms. Key risks are material deterioration in trading environment and unexpected surged in capital expenditure.
|Financial Summary||FY 14||FY 15||FY 16||LTM
|Price to Earnings||13.2x||17.3x||8.7x||11.6x|
|Price to Net Tangible Assets||2.6x||2.6x||1.7x||1.6x|
|Price to FCF||16.2x||19.1x||9.6x||n.a|
|EV / EBITDA||10.8x||11.6x||7.7x||10.2x|
|Net Profit Margin (in %)||16.5||12.9||19.6||15.9|
|Free Cash Flow RM’m||49.5||45.6||69.5||n.a|
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