INITIATION REPORT 03 March 2011 Name of PLC: Muda Holdings Berhad Target Price: RM 1.05

Transcription

1 INITIATION REPORT 03 March 2011 Name of PLC: Muda Holdings Berhad Target Price: RM 1.05 Business Summary : Manufacturing of paper, corrugated carton and paper related products. Major Shareholders : Hartaban Holdings Sdn Bhd 34.85% Lim & Khoo Sdn Bhd 18.39% Lim Siew Lee 4.94% PLC Website : Recommendation: Buy IR Contact : Janet Goh Company Secretary Market Capitalisation: RM 230.6m invest-info@muda.com.my Constituent of :- - FBM Emas - FBM Small Cap - FBM Shariah Current Price : RM 0.77 Market / Sector: Main Market / Industrial Products Stock Code: 3883 Analyst : Lim Boon Ngee Tel : ; bnlim@nra.com.my Key Stock Statistics FY09 FY10 FY11F FY12F EPS P/E (x) Dividend/Share NTA/Share (RM) Book Value/Share Issued Capital (m shares) weeks Share Price Range (RM) Per Share Data FY09 FY10 FY11F FY12F Year-end 31 Dec Book Value (RM) Opt Cash Flow (sen) Earnings (sen) Dividend (sen) Payout Ratio (%) PER (x) P/Cash Flow (x) P/Book Value (x) Dividend Yield (%) ROE (%) Net Gearing (%) P&L Analysis (RMm) FY09 FY10 FY11F FY12F Year-end 31 Dec Revenue , ,235.1 Operating Profit Depreciation (39.9) (37.3) (37.8) (38.4) Net Interest Expense (14.3) (15.1) (15.0) (14.9) Pre-tax profit Effective Tax Rate (%) 54.0 (18.8) (18.8) (18.8) Net Profit Operating Margin (%) Pre-tax margin Net margin Investment Highlights/Summary Muda Holdings Berhad (Muda) is an investment company with its subsidiaries are principally involved in the manufacturing of paper, corrugated carton and paper related products. Malaysia, being a net importer of paper, remains the main market for Muda. Muda s FY10 results were strong, as pretax profit jumped > to RM54.3m from RM26.4m, underpinned by a favourable economic environment, better demand and higher selling price. We anticipate earnings growth to sustain, as demand remains resilient, and new capacity comes onstream for Muda. Based on our estimates, the stock trades on a forward FY11 PER of 4.9x. Given the attractive PER valuations and favourable growth prospects, we initiate with a BUY recommendation on the stock with a price target of RM1.05. Page 1 of 9

2 2. Company Background/Overview History Muda is a pioneer in the paper milling and paper packaging in Malaysia, focusing on paper and paper related business. The first paper mill is in Tasek, Penang in 1964 and the first corrugator plant in Petaling Jaya in Muda was listed on the Main Board of Kuala Lumpur Stock Exchange (now known as Bursa Malaysia) in The group owned one the largest integrated paper mill and corrugated plants in Malaysia and currently have offices in Malaysia, Singapore, China, Australia and United Kingdom. Corporate structure Manufacturing Trading Others Muda Paper Mills Sdn Bhd (Kajang) Muda Paper Mills Sdn Bhd (Tasek) Federal Packages Sdn Bhd Muda Packaging Industries Sdn Bhd Muda Pasifik Sdn Bhd Kotak Malaysia (KOM) Sdn Bhd MC Pack (Malaysia) Sdn Bhd 65% Muda Packaging Industries (Qingyuan) Ltd Muda Paper Converting Sdn Bhd Central Malaya Paper Sdn Bhd Intrapac Trading (M) Sdn Bhd Intrapac (Australia) Pty Ltd Intrapac (Singapore) Pte Ltd 70% Intrapac Investment Limited KL Resources Pte Ltd 56% Asia Recycling Resources Pte Ltd 55% Ee Sin Paper Products (Pte) Ltd 60% Intra-Muda Holdings Sdn Bhd Muda Management Services Sdn Bhd Muda Land Development Sdn Bhd RJ & R Holdings Sdn Bhd Muda Global Engineering Sdn Bhd Choice Impact Sdn Bhd 49% Key areas of operation Muda is an investment company with its subsidiaries principally involved in the manufacturing of paper, corrugated carton, paper related products and trading in imported paper and paper related products for the domestic and export market. Wastepaper is the main source of raw material in its paper manufacturing. The company has numerous wastepaper collection centres throughout Peninsular Malaysia to secure its supply. Muda is currently recycling more than 0.5m metric tons of wastepaper annually. Except for one corrugated box plant in Qingyuan, China, the manufacturing activities are mostly centred in Peninsular Malaysia where they have two factories for paper milling, four factories for making corrugated boxes, a factory for multi-wall paper bags and a factory for PE laminated paper, paper bags and paper-based stationery. Page 2 of 9

3 Muda s business activities can be classified into three main categories, namely :- Manufacturing - manufacture various types of industrial paper, corrugated cartons, honeycomb paper products, paper bags and laminated paper; Trading - trading in paper and paper related products, machinery and machinery components; and Others - investment holding, property holding, management and insurance agency services. Industrial grade papers comprise of Test Liner, Corrugated Medium, Laminated Chip Board, Core Board, Grey Chip Board, Yellow Wrapping Paper, Inserting paper, Manila paper, MF Kraft. Its industrial grade papers are used for the making of corrugated carton boxes, corrugated board sheets and lightweight dice system packaging materials, which is used in the making of pallets and as inner layer of doors, partitions and the furniture industry. Medium and liner accounted for 70% of the group s total production while the other 30% represent other paper products. The group have just added a new paper machine at its Kajang plant in This machine, costing RM180m, has an approximate production capacity of 150,000 metric tons, and is expected to increase the group s combined production capacity to approximately 500,000 metric tons per annum from 350,000 metric tons when it is fully operated in 4QFY10. This is set to make Muda the largest industrial grade paper producer in Malaysia. Committing to environmental issues, Muda operates its own water treatment plants to ensure no harmful discharge to the surrounding areas, and conserves water by reusing the treated water in the manufacturing processes. The group also invested in cogeneration technology in their paper mill to improve on thermal efficiency and reductions in emissions of carbon dioxide. The state of the art Combined Heat and Power Plant (CHP) can generate 9.6MW of power through the burning of natural gas, which will ensure low fuel consumption and reduce its operating cost. Paper Making Process Source : Page 3 of 9

4 Source : Malaysian Corrugated Carton Manufacturers Association (MACCMA) Revenue breakdown RMm 1,200 1, , FY07 FY08 FY09 FY10 FY11 (Estimate) Manufacturing Trading Others Revenue from manufacturing and trading of various types of industrial paper and paper related products accounted for 95% of total group revenue in FY10 with the balance made up from investment holding, property holding, management and insurance agency services. 3. Management and Board: Dato Azaman Bin Abu Bakar, DIMP, 63 Managing Director - Appointed to the board on 19 March 1985 as executive director - Appointed as Deputy Chairman in October Re-designated to Managing Director in Chairman of the Executive Committee and member of Remuneration Committee and sits on the board of several local and overseas subsidiaries in the group Page 4 of 9

5 Dato Lim Wan Peng, 67 Executive Director - Appointed to the board on12 July Has been an Executive Director of the company since Started his career in Muda as Manager in 1970 before promoted to Deputy General Manager in He was appointed Executive Director of Muda Paper Mills Sdn Bhd in 1983 and concurrently the Managing Director of of Muda Paper Mills Sdn Bhd and Federal Packages Sdn Bhd. - Involved in the management of the Paper Milling and Trading Division of the Group. Lim Chiun Cheong, 46 Deputy Managing Director - Appointed to the board on 23 April Involved in the management of Paper Milling, Packaging and Trading Division of the Group - He is currently the Vice President of Malaysian Pulp & Paper Manufacturers Association - Son of Tan Sri Lim Guen Teik, the Chairman of the Company and is the nephew of Dato Lim Wan Peng, an Executive Director and Mr Lim Wan Hoi, a major shareholder of the Company. - He is the major shareholder of the Company 4. Financial Review Historical Revenue and Pre-tax Margin Performance Muda recorded its highest sales in FY10, having increased 32.9% to RM933.9m from RM702.9m in FY09, whilst pre-tax profit jumped > to RM54.3m in FY10 from RM26.4m. The stronger performance in FY10 was mainly attributed to a favourable economic environment, where market demand picked up in Malaysia and Singapore, and selling price firmed. 5. Recent Developments On 18 May 2010, the group through its subsidiary, Muda Paper Mills Sdn Bhd, had obtained a syndicated loan amounted RM150m to part finance its capacity expansion in its Kajang plant. The group is building a two storey factory building, installing additional paper machine lines, and upgrading its ancillary systems and essential infra-structure facilities such as raw water treatment plant, effluent treatment plant and combined heat and power plant to cater for the increase in output at its Kajang plant. Page 5 of 9

6 6. Industry Landscape/Overview According to Malaysian Pulp and Paper Manufacturers Association (MPPMA), there are about 20 paper manufacturer in Malaysia with combined production capacity estimated at 1.5m metric tons per annum. Malaysia is a net importer and the existing paper production capacity does not fulfil the domestic consumption. Almost half of the country requirements are imported, which according to Malaysia Pulp and Paper Association (MPPA), the industry strategy is to remain domestic-market oriented. By increasing its production capacity, the company could substitute the import supply that shortage from the market. The Malaysian paper industry is heavily dependent on imported wood pulp and wastepaper to meet part of its raw material needs. Muda has the most integrated wastepaper collection in Peninsular Malaysia with their network collection centres are strategically located in all major towns and collecting over 0.5m tons of wastepaper annually. 7. Competitive Analysis Comparative Valuation Muda HPI Ornapaper Box-Pak Share Price 2 Mar Mkt. Cap (RM mil) P/E FY09 (x) P/E FY10 (x) P/NTA Yield 3.2% 2.1% 2.5% 6.1% ^ based on reported full year or annualised net profit Share Price Chart of Muda, HPI, Ornapaper and Box-pak RM Jan-10 Mar-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Muda HPI Ornapaper Box-pak Page 6 of 9

7 8. Earnings Outlook Growth in Muda will continued to be fuelled by demand drivers in the Malaysian market, where economic growth is expected to sustain, and demand in downstream paper products such as corrugated carton boxes, tissue paper, light weight coated paper, medical grade coated paper and paper-based stationery remain buoyant. Malaysia is a net importer of paper and paper related product, Muda s expansion capacity could easily be taken up once it comes to the market. The new paper machine which carries production capacity of approximately 150,000 metric tons per annum, will increase the group total production capacity to approximately 500,000 metric tons per annum. We expect Muda to sustain revenue growth of 15% in FY11 to RM1,074.0m, and a consequent increase of 28.5% in its profit before tax to RM69.7m on the back of sustaining demand, firm paper prices and timely increase in production capacity. 9. Key Investment Risks Fluctuation in paper prices may hamper operating profit margins. Uncertainty in economic trend, given the political issues in the Middle East, and rising food and commodity prices. Single-digit profit margins could be vulnerable to operational inefficiencies. 10. Dividend Policy Muda does not have a dividend policy but it had been consistently paying dividend to reward its shareholders. In FY10, it had declared a dividend of 2.5sen/share, which translates into a dividend payout ratio and yield of 20.8% and 3.2% respectively. We expect the company will continue to maintain the dividend payment going forward. 11. Balance Sheet Group s net borrowings stood at RM372.8m as at 4QFY10, an increase of RM123.9m from end-fy09; this translates to a net gearing of 69% from 49%. Higher gearing mainly reflected the expansion of production capacity at their Kajang plant in Balance Sheet (RMm) FY09 FY10 FY11F FY12F Year-end 31 Dec Total Assets , , ,257.9 Fixed Assets Current Assets Long Term Assets Current Liabilities Long Term Liabilities Share Capital Shareholders Funds Source : Annual Reports and Netresearch-Asia estimates Page 7 of 9

8 12. Valuation and Recommendation We initiate coverage on Muda with a BUY recommendation for the following reasons :- Muda is the largest industrial grade paper producer in Malaysia with an eventual combined production capacity of approximately 500,000 metric tons per annum. Growth prospects underpinned by sustaining demand, firm paper prices and timely increase in production capacity. At current share price of RM0.79, Muda trades at a P/NTA of 0.4x, based on NTA of RM1.80/share, and a forward P/E of 4.9x, based on an EPS of 16.2sen. If we re-rate the stock to a historical peer group rating of 6.5x, which is >50% discount to market P/E of 14x, Muda trades at a price target of RM1.05 per share. Page 8 of 9

9 Disclosures/Disclaimer Investment ratings: Buy (generally >10% upside over the next 12 months) Hold (generally negative 10% downside to positive 10% upside over the next 12 months) Sell (generally >10% downside over the next 12 months) This report has been prepared by Netresearch-Asia Sdn Bhd for purposes of CMDF-Bursa Research Scheme ( CBRS ) III, administered by Bursa Malaysia Berhad ( Administrator ) and has been compensated to undertake the scheme. Netresearch-Asia Sdn Bhd has produced this report independent of any influence from the Administrator or the subject company. For more information about CBRS and other research reports, please visit Bursa Malaysia s website at: The information and opinion in this document has been obtained from various sources believed to be reliable. This publication is for information purpose only, and must not be relied upon as authoritative or taken in substitution for the exercise of judgment. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. Opinions expressed in this publication are subject to change without notice and any recommendation herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. No representation, express or implied, is made with respect to the accuracy, completeness or reliability of the information or opinions in this publication. Accordingly, neither we nor any of our affiliates nor persons related to us accept any liability whatsoever for any direct, indirect or consequential losses (including loss and profit) or damages that may arise from the use of information or opinions in this publication. Netresearch-Asia Sdn Bhd and its related companies, their associates, directors, connected parties and/or employees may own or have positions in any securities mentioned herein or any securities related thereto and may from time to time add or dispose of or may materially be interested in any such securities. Netresearch-Asia Sdn Bhd and its related companies may from time to time perform advisory, investment, communications or other services for, or solicit such advisory, investment, communications or other services from any entity mentioned in this report. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Page 9 of 9