· Has underperformed thus far, but … Pelikan International Corporation (PELIKAN) has dipped ~11% from RM1.27 since we published a Trading Buy note on 8 October 2014. While the price performance of PELIKAN seems lacklustre, we still believe it is an unpolished gem and will soon be in the limelight after the completion of its corporate restructuring.

· To recap, the Group has proposed to inject its core stationery sales and distribution assets into 70.9%-owned subsidiary, Herltiz AG (HAG), in a deal that would see PELIKAN raising RM462m/EUR110m through an offer for sale and private placement of new shares issued by HAG in conjunction for its listing in Frankfurt stock exchange. Correspondingly, PELIKAN’s effective stake in HAG will be reduced 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. At the same time, PELIKAN will still own some less profitable and lossmaking assets, including a printer consumable business with plants in Switzerland, China and Scotland. These assets are lined up either for disposal or closure in the near-term. Shareholders of PELIKAN & HAG have given their green-light for this asset streamlining exercise in late-Dec14.

· Post restructuring, the Group may repay RM150m bank borrowings from the RM462m proceeds. This should see c.RM6m interest saving at PELIKAN level in FY15. Meanwhile, RM182m is allocated for 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 RM165m (or 30 sen/share) from the proceeds will either be utilised as extra working capital to allow PELIKAN to reorganise or strengthen its remaining businesses or to reward shareholders, say via generous dividend.

· Emergence of a new substantial shareholder, suggesting a vote of confidence? Paul Poh Yang Hong, who is said to be a long-time associate of tycoon Tan Sri Quek Leng Chan, has emerged as a substantial shareholder of PELIKAN with a slightly >5% stake via his investment vehicle Caprice Capital International Ltd.

· PELIKAN to benefit from European QE? The European Central Bank has launched a landmark bond-buying program from Mar15 until the end-Sep16. This quantitative easing (QE) program has boosted European equity market and is expected to strengthen consumer sentiment. As such, HAG’s prospect seems bright and we do not rule out HAG to command a better than expected valuation, leading to higher estimated proceeds for PELIKAN from sale and private placement of new shares of HAG, due to stronger investment sentiment. Note that Deutsche Boerse AG German Stock Index (DAX) is trading at >18x 12-month trailing PER which is higher than its historical end-2014 PER of c.16.5x. Nonetheless, these positive factors could be capped by translation loss in currency arising from weakening of Euro against Ringgit (Euro has depreciated by >7% since late-2014 against Ringgit).

· 3Q14 results review. QoQ, revenue of PELIKAN grew 4.5% due to better sales in the European region. We understand that sales in Eastern Europe have been more encouraging with growth of c20.0%. However, net profit declined ~80%. Apart from stronger domestic currency in 3Q14, we also saw much lower cost arising from the reorganisation measures taken in 2Q14. On a 9-month basis, PELIKAN registered RM1.1bn (-2% YoY) in revenue and RM9.5m (+145% YoY) in net profit. These figures accounted for 73% and 36% to our FY14 revenue and net profit estimates of RM1.5bn and RM26.2m, respectively. Even though 4Q14 profitability may improve in tandem with weaker (~7%) Ringgit against European dollar in early-to-mid 4Q14, we see higher risk of PELIKAN missing our earnings estimate.

· To be news flow driven? Having said that, we are not overly concerned and maintain our earnings estimates pending for the forthcoming 4Q14 results as we believe the share price performance of PELIKAN is likely to be driven by its corporate exercises, i.e. listing and placement of HAG and disposals of other non-core assets such as the printer consumable business.

· All told, we reiterate our “Trading Buy” call with an unchanged TP of RM1.55, based on a targeted 12.6x FY15 PER. Our rating is premised on: (i) earnings returning to the black following the successful business rationalization, (ii) injection of core stationery business into HAG, which unlocks the value of the assets while strengthening its balance sheet, (iii) huge cash piles from asset injection to be utilised for the development of its stationery business, and (iv) potential gain on disposal of its noncore assets, which carry zero or low value in its balance sheet. 

Source: Kenanga