Business rationalization bearing fruits. Extensive business rationalization has narrowed Pelikan International Corp Bhd (PICB)’s net losses post the Herltiz AG (HAG) acquisition to RM5.5m in FY13 from RM88.4m in FY11 (FY12:RM59.1m). Most recently, the Group recorded PATAMI of RM17.2m in 2Q14 and RM6m as of 1H14 (vs. PATAMI of RM8.8m in 2Q13 and LATAMI of RM0.5m as of 1H13) as the efforts of cost-cutting (labour, overhead, and distribution) and disposing unprofitable businesses proved to be effective for the Group to return to the black again.

Asset injection to boost coffer. To recap, the Group has proposed to inject its core stationery sales and distribution assets into its 70.9%-owned Frankfurt-listed subsidiary, HAG in a deal which would see PICB raising RM462m/EUR110m through offer for sale and private placement of new shares issued by HAG, correspondingly reducing PICB effective stake in HAG to 65.4%. The assets injected include the core stationery sales units in countries including Germany, Switzerland and Belgium from Europe, and Mexico, Argentina and Colombia from Latin American. Other assets comprise of sales unit in Japan and Middle East as well as a logistics property in Germany. The mentioned assets contributed total revenue of RM808.4m and PBT of RM60.1m to PICB in FY13, translating into a PER consideration of 10.2x.

Proceeds to strengthen PICB as a whole. Out of the RM462m in proceeds, the Group has earmarked RM150m for repayment of bank borrowings, which would save PICB c.RM6m in finance costs in FY15 in our view. Meanwhile, RM182m or 39.4% is planned for new product innovation and development of new sales and distribution channel in order to penetrate new markets. The mentioned amount also includes A&P expenses to enhance the branding of both Pelikan and Herlitz brand names. The remaining RM115m of proceeds would be utilised as extra working capital would allow PICB to reorganise or strengthen its remaining businesses that it will be holding after the asset injection, which is expected to be completed by 31 Dec 2014.

Revitalised HAG to drive earnings growth. Moving forward, earnings growth will be underpinned by the reformed HAG, which will be holding key European and Latin American sales units. Meanwhile, the Group is also aiming to dispose or downsize its printer consumable business in the near term with plants in Switzerland, China and Scotland being lined up for disposal or closure. We understand that the disposal of the Scotland plant, which incurred RM9m of net loss in FY13, could materialise earliest by end of FY14. We project the Group to achieve net profit of RM30.5m in FY14; RM68.4m and RM79.2m in FY15 and FY16, translating into growth of 124.5% and 15.8%, respectively.

Trading Buy with a TP of RM1.55, based on a targeted 12.6x FY15 PER, which is in line with FMB Small Cap Fwd. PER. Our rating is premised on: (1) earnings returning to the black following the successful business rationalization, (2) injection of core stationery business into HAG, which unlocks the value of the assets while strengthens its balance sheet, (3) huge cash piles from asset injection to be utilised for the development of its stationery business, and (4) potential gain on disposal of its non-core assets, which carry zero or low value in its balance sheet.

Source: Kenanga