Summary

• Asia File Corporation Bhd (ASIAFLE) 2Q23 core net profit fell 9.4% YoY to RM7.8m, led to a 37.5% decline in 6M23 core net profit at RM25.4m. The results came in below expectations, amounting to 43.7% of our full year forecast at RM36.3m and 33.4% of consensus forecast at RM47.6m. Key deviation was mainly due to the fluctuation of foreign exchange rate.

• YoY, the decline in core net profit was due primarily to the weakening of both GBP and EURO which has affected the group’s bottom line. GBP/MYR contracted from 5.65 to 5.17 while EURO/MYR dropped from 4.85 to 4.55 YoY. Besides, the significant decline in GBP/USD and EURO/USD of more than 15.0% for the past one year has put additional pressure on ASIAFLE’s margin as majority of its export proceeds are denominated in GBP and EURO while imports are mainly denominated in USD.

• For 6M23, core net profit slipped despite a higher revenue, as total foreign exchange loss of RM4.0m was incurred as opposed to a foreign exchange gain of RM3.1m recorded in the previous corresponding period. Additionally, the result was adversely impacted by the RM1.1m loss at the associate level as compared to a profit of RM6.3m in the previous year.

• QoQ, the drop in core net profit was mainly resulted from a lower turnover from both filing products and consumer & food ware products segments. In addition, higher operational costs, particularly the sharp increase in energy prices during the quarter, had an impact on its operations abroad.

• While ASIAFLE is exposed to foreign currency risk on sales, purchases and borrowings, the group’s strong balance sheet position has enabled it to better manage the currency volatility. As at 2Q23, net cash position stood at RM200.2m (net cash per share: 102.8 sen).

• Moving forward, we believe the contribution from the filing products segment will remain steady. Meanwhile, the group’s previous effort in diversifying the business segment to include recyclable food ware and household products will help maintain the growth in revenue and set the foundation to expand its product range as well as penetrating into new markets. However, the increase in operational costs amid the inflationary environment may weigh on the group’s margin.

Valuation & Recommendation

• As the reported earnings came in below our expectations, we downgraded our FY23f, FY24f, and FY25f earnings forecast by 9.4%, 3.3%, and 3.7% respectively to RM32.9m, RM41.2m, and RM45.6m. The earnings forecast will take into account the margin pressure faced by the group arising from the declining GBP/USD and EURO/USD, as well as the higher operational costs.

• We maintained our HOLD recommendation on ASIAFLE, with a lower target price of RM1.69. The target price is derived by ascribing a P/E of 10.0x to FY23f EPS of 16.9 sen.

• Risks to our recommendation include potential supply chain disruption which could give rise to a variety of business costs. Besides, the group is exposed to foreign currency risk as its export proceeds are primarily denominated in GBP and EURO while import is mainly priced in USD. Any further decline in GBP/USD or EURO/USD may add pressure to the group’s margin.

Source: Mplus Research - 1 Dec 2022