Summary

• Asia File Corporation Bhd (ASIAFLE) 4Q23 core net profit fell 8.7% YoY to RM9.4m,  leading to a 27.1% YoY decline in FY23 core net profit at RM31.6m. The results  came in largely in line with our expectations, amounting to 96.0% of our full year  forecast at RM32.9. Meanwhile, a single-tier final dividend of 3.5 sen per ordinary  share was declared.

• YoY, the decline in core net profit was due primarily to lower local sales arising from  overall weaker consumer spending, as well as share of loss in associate of RM3.9m  as compared to a share of profit of RM3.1m in the previous corresponding quarter.  However, the group saw margin expansion YoY due to better cost control and lower  freight rates incurred. QoQ, core net profit expanded 46.2% on the back of higher  turnover and improved operation efficiency.

• For FY23, the lower core net profit was mainly stemmed from a drop in filing division  revenue, coupled with the share of loss of associate of RM8.7m as compared to  share of profit of RM13.0m in FY22. On the bright side, the recyclable food ware and  consumer ware booked 1.7% increase in revenue, while operating margin surged by  31.3% driven by cost control measures such as effective procurement strategy and  effort in improving operation efficiency.

• Moving forward, we expect the contribution from filing division to remain steady  with opportunities arising from market consolidation activities in UK and Europe  where sellers are expected to have increased market power and better pricing  control. On the flipside, challenges could include reducing demand resulted from  digitalization and higher energy cost in UK and Europe.

• Meanwhile, we continue to like the recyclable consumer and food ware division with  potential to expand overseas. We expect a better margin in this division as the  group is in a transition period of moving from lower margin items to bigger items  such as storage box, furniture range, cabinets etc.

• The group’s expansion plan will be backed by its solid net cash position that  remained solid at RM249.1m (net cash per share: RM1.28) as at 4Q23.  Nevertheless, the overall soft market sentiment amid inflationary pressure may  continue to weigh on consumer spending.

Valuation & Recommendation

• Although the reported earnings came largely in line with our expectations, we  reduced our earnings forecasts by 6.3% and 6.8% to RM38.6m and RM42.6m for  FY24f and FY25f respectively, taking into account the ongoing burden of associate  losses.

• Despite the mild revision to our earnings forecasts, we upgrade our  recommendation from HOLD to BUY as we rolled over to FY24f earnings forecast,  with a revised target price of RM1.98. The target price is derived by ascribing a P/E  of 10.0x to FY24f EPS of 19.7 sen.

• Risks to our recommendation include the possibility of heightened inflation caused  by supply chain disruption, potentially leading to elevated operating costs. Besides,  the group faces exposure to foreign currency risk as its export proceeds are  primarily denominated in GBP and EURO while import is predominantly priced in  USD. Any further depreciation of GBP/USD or EURO/USD could exert pressure to the  group’s margin.

Source: Mplus Research - 30 May 2023