MY ER Marco Holdings Berhad – May 2017

Stock Code 3514.KL
Investment Rating BUY (Initiate Coverage)
Current  Price RM 0.165
Target Price RM 0.205
Estimated Return +24.7%
Market Cap RM 173.9m (as of 12/05/17)

Company Profile:

Marco Holdings Berhad distributes electronic calculators, watches, musical instruments and digital cameras. It has a geographical presence in Indochina and Singapore.


Investment Considerations:

1) Strong balance sheet and cash flow generation. However, expect margins to remain depressed.
The company is underpinned by low leverage and net cash position of RM 83mil which is equivalent to 46% of the market cap. Though we agree that the cash position might reflect the unproductive use of assets, it is partially offset by an above average cash flow generation. Its cash flow excluding working capital and free cash flow are yielding, on average 10% and 7% based on 10-year historical performance. Looking ahead, we are cautious on the outlook in terms of profit margins attributable to weaker Ringgit and consumer sentiment. Projected net profit margins are in the region of 6% to 7% (FY16: 9.6%).

2) Robust growth in core operations despite weakness in the trading environment.
Weak consumer confidence might have led to robust growth in watches segment (over 70% of the revenue) as the products are geared toward affordability yet fashionable which has enjoyed a 3-year CAGR of 18%. Having said that, other three segments are experiencing a weakening in demand such as Digital Cameras and musical instruments. The potential threat of a shift in preferences with the existence of smartphones with better camera quality and smart watches. In our projection, we estimated that FY17 revenue would only grow by 1.5% and gradually increases to 2% compared to historical CAGR of 9.5%.

3) High capacity for special dividend and further leverage.
High net cash position allows shareholder friendly policies such as special dividend and shares buyback. The capital structure could be gear more toward debt-financing to improve the cost of capital.

4) Leasehold vacant land is negative given its minimal positive impact on the core operations.
Two pieces of vacant land may have appreciated in value but being leasehold (useful life of over 90 years) might mean diminishing value over time if they remained vacant. Also, it is significantly understating the ROE. The management should look to monetize the lands.

5) Initiate coverage with a BUY rating based on DCF valuation.
ur DCF-derived target price of RM 0.205 which reflects an upside potential of 24.7%. Though we do not anticipate any near-term positive catalysts, we like the company for its defensive play, consistently generate satisfactory cash flow and strong balance sheet.


Financial Summary FY 13 FY 14 FY 15 FY 16
Price to Earnings 8.51x 9.36x 8.21x 9.12x
Price to Net Tangible Assets 1.20x 1.16x 1.00x 0.91x
Price to FCF 12.44x 9.36x 33.54x 11.57x
EV / Adj. EBITDA 5.68x 3.95x 5.26x 10.71x
Net Profit Margin (in %) 12.62% 11.89% 11.85% 9.59%
Free Cash Flow RM’m 10.3 18.1 4.9 13.7

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The opinions and views presented in this website and equity research reports are based on facts (which Yield Mountain believes to be reliable and correct) and subjective judgements. It is only for information purpose and does not consider the unique circumstances of the readers. It is not intended as an offer to buy or sell the securities discussed. All the information is based upon publicly available information. Whilst every effort is made to ensure the opinions and views are accurate, we are not auditors and do not independently verified every source used. Past performance is not necessarily an indicative of future performance and the contributors at Yield Mountain will not accept for any losses arising from information contained in this report. The contributors may form forward-looking views (projections and estimations) of the companies which may not necessarily be true. Market conditions and unforeseeable events may lead to materially different outcomes. Yield Mountain strongly recommends the readers to seek independent advice from their brokers to understand the investment risks arising from taking investment actions based on the Yield Mountain’s equity research.

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