|Investment Rating||BUY (Initiate Coverage)
|Current Price||RM 0.165
|Target Price||RM 0.205
|Market Cap||RM 173.9m (as of 12/05/17)|
Marco Holdings Berhad distributes electronic calculators, watches, musical instruments and digital cameras. It has a geographical presence in Indochina and Singapore.
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.
Our 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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