Re-entering position with a “Trading Buy” call on fair value of RM2.50. The recent FY17 results have surpassed expectations, thanks to effective cost savings and more efficient production methods. Going forward, we expect growth to be driven by the production commencement of its new factory cum warehouse, and operations of its first overseas production plant in Vietnam in 1H19. It also recently announced a 30% dividend policy.

Solid FY17 results. The latest FY17 results recorded revenue of RM106.3m (+18% YoY) which was slightly above our estimate of RM99.9m due to stronger sales in both domestic and export demand. The widely untapped African market continued to prove itself as the highest growth region. Net profit for the year, however, registered at RM23.7m (+42% YoY) which beat our expected RM15.7m target. The higher earnings were realised as margins expanded from lower raw material prices as well as cost savings from product improvements and better economies of scale.

Factory cum warehouse completed. Management updated that the construction of the new warehouse-cum-factory has been completed and is pending final infrastructural approvals before commissioning. The new facility should boost the group’s production rate to c.9,000 tonnes/year (+25% from c.7,200 tonnes/year) by end FY18 (or CY18Q2). However, as the surrounding layout of the facility allows for better storage management, this has allowed for more optimised allocation of space and production methods in the existing plants.

Expanding in Vietnam. The group had recently announced plans to construct a new plant expected to commence production by FY19 (or CY19Q2), with a production capacity of c.1,500 tonnes/year (+c.17% of total group capacity after the commissioning of the new facility). Vietnam is currently the largest importer of the group’s products and the factory would allow more efficient product delivery to its clients there, while also enabling better penetration towards surrounding regions. We are upbeat with this plan as it should also allow for cost savings with lesser export duties and delivery costs incurred. However, contributions from here may only be reflected in FY20.

Creating room to grow. While we had previously expressed concerns of limited growth prospects arising from a potential overutilisation of production after the completion of the new factory, we were positively surprised with the results of the group’s emphasis on product R&D in recent quarters which not only reduced input costs while maintaining quality but also allowed for more effective production methods. As the abovementioned plans are expected to materialise in the near future, we believe the group is well positioned to reap the fruits of its efforts and could potentially see more vibrant results. Hence, we estimate net earnings for FY18/FY19 to record at RM27.8m/RM30.7m (+17%/+11% YoY).

“Trading Buy” with a TP of RM2.50. Our TP is based on a higher 13.0x PER (from 11.0x PER, previously) over its FY19E EPS of 19.3 sen. We believe the positive re-rating is justified driven by its improving operational capabilities and efforts to expand its export outreach. Further, the recent 1:2 share split has boosted liquidity and allows for more active shareholder participation. Risks to call include: (i) delay in commencement of new plant operations, and (ii) significant increase in raw material costs.

Source: Kenanga Research - 12 Jul 2017