• Seng Fong Holdings Berhad (Seng Fong) is poised to benefit from economic recovery post pandemic as demand for tyre is expected to improve given the expected improvement in consumer sentiment and purchasing power.

• With good track record, the company managed to maintain a strong relationship with existing clients and suppliers.

• Cost wise, it has the ability to pass the increase in input cost to customers on regular basis which helped the company to sustain a steady gross margin of between 7.1%-9.7% in FY19 and FY21 respectively.

• In the near term, the Group is planning to increase their production capacity and improve ESG practices consistent with their aim for environmental sustainability.

• Seng Fong is valued at RM0.85 which is derived based on PER of 9.5x pegged to CY23F EPS of 8.9 sen. At our target price, the IPO offers a decent upside potential of 13.3%

Promising outlook to be spurred by recovery in automotive industry

Seng Fong could reap the benefit from the recovery in tyre demand as c.70% of global natural rubber supply are used for tyre manufacturing, Demand for tyre may surge in line with the increase in vehicle sales as well as replacement of worn–out tyres post pandemic.

Massive production and cost-saving approach to boost near term growth

The management is optimistic that it will be able to increase production capacity to 166k/mt p.a by FY23 following the increase in production hours to 17hours/day in Factory 2. This is on top of second working shift for Factory 3 together with additional of 48 and 45 new workers for both factories by 2QCY23 and 2QCY22 respectively. The group will also install solar and biomass systems on their factories as an effort to reduce operating costs - in line with their ESG vision on achieving environment sustainability.

Fundamentally attractive

Seng Fong is expected to register a higher GP margin going forward as they are able to adjust the average selling price (ASP) on regular basis in tandem with the hike in direct costs. As such, we forecast Seng Fong GP margins to reach 10.3%/10.4%/11% for FY22F/FY23F/FY24F respectively, thanks to better cost management measure i.e., a cost pass through to customers.

Seng Fong is valued at RM0.85 per share

We derived a FV of RM0.85 for Seng Fong. Our valuation is based on Bursa Malaysia Industrial Production Index’s 1-yr forward PE of 9.5x pegged to CY23f EPS of 8.2 sen, a value proposition that is reflective to its potential. Our assigned PER is reflective of its commendable outlook, consistent margin growth and attractive revenue growth. This will also be underpinned by its strong track record in mid-stream rubber industry as well as recovery in automobile industry.

Source: BIMB Securities Research - 5 Jul 2022