- Review of 9M14 results. For the recently concluded corporate earnings season, Asia File Bhd (ASIAFLE) reported an impressive 3Q14 net profit of RM15.4m (+49% YoY) which brought its 9M14 net profit to RM46.1m (+32%). This set of results was far exceeded expectations, at 87% of our full-year forecast, with the strong numbers underpinned by (i) improved sales (+19% YoY) through its strengthening position in Europe and favourable exchange rates for GBP and EUR, coupled with (ii) greater economies of scale and operational efficiency, which led to a 2.3ppt EBIT margin expansion (from 17.0% in 9M13 to 19.3% in 9M14).

- It is just the beginning. With the inflection in its earnings trend after a few challenging years, ASIAFLE has begun to garner investors’ interest. In fact, ASIAFLE's share price has gained handsomely by 68% since our "Trading Buy" recommendation just three months back (RM4.28 on 12 Dec-13). The stellar gains represent a stark outperformance over the benchmark FBMKLCI which had instead lost 1.4% (from 1,843 to 1,817 points) over the same period. Even so, we believe that there still is more value and further upside to the stock post our meeting with the management.

- Combined synergies. ASIAFLE has been on an acquisition spree since the global financial crisis in 2007 with notable purchases, including( i) an OEM dividers and indices manufacturer in Germany, (ii) a paper mill and the No.1 file manufacturer in the UK, as well as (iii) manufacturing equipments from leading manufacturers in France and Czech Republic. Through these acquisitions, not only has ASIAFLE been able to open up new markets, but also create an environment where there are fewer competitors with less intense pricing pressures. More importantly, ASIAFLE now has full control of supply and distribution chain management, which provide added cost advantages and operational efficiency.

- Replicating its UK success story. Now with economies of scale and operational efficiencies gradually coming to fruition, ASIAFLE is poised to enter the next stage of growth by replicating its UK success story in Europe (a market 4-5x the size of the UK market). ASIAFLE is already the No.1 player in the dividers & indices category in Europe, and we see great potential in its plans to expand its product categories to include Lever Arch Files in the continent. Its investment in MUDA Holdings Bhd (purchased in 2008 for RM44.5m) would also serve as an additional kicker, as ASIAFLE’s 20% stake in the company is trading at a market value of c.RM106m (based on MUDA’s share price of RM1.73) and could be sold to provide funding for a few more sizable acquisitions in Europe, if not being paid out as special dividends to shareholders.

- Maintain TRADING BUY. Post 9M14 results, we are increasing our revenue growth and EBIT margins (+1.4ppt and +2.1ppt) assumptions to take into account (i) the increased contributions from new market segments, (ii) better gross profit margins and (iii) increased operating efficiency. These resulted in our FY14-FY15E net profit forecast being revised up by 18.2%-25.0% to RM63.1m-RM76.6m (54.4 sen-66.1 sen). At the same time, we value ASIAFLE at RM7.82 based on sum-of-parts valuation, which assumes (i) a PER of 11.5x (FBM Small Cap Fwd. PER) over CY14 EPS of 56 sen excluding profit from associate MUDA and (ii) valuing the MUDA stake based on a PBV of 1.0x (in-line with the United Kotak privatization offer). Including an estimated 27 sen in dividends, this implies a total return of 12%.

Source: Kenanga