We are issuing a Not Rated call on PERSTIM with a fair value of RM6.05. Despite a relatively stable market demand, profitability is under pressure from volatile raw material costs as the group maintains its competitive pricing to customers. Continuous investments to improve economies of scale could revitalise margins in the medium-term. Nonetheless, the stock could present an attractive dividend opportunity of c.6% yield in FY19.

Premier producer and supplier of tinplate. PERSTIM manufactures tinplate for the domestic and export markets. Applications for their products vary from food cans, non-carbonated cans, containers and electrical parts. The group has a second production facility operating in Vietnam, which caters to the market there while also servicing nearby regions. The group’s primary raw material component consists of tin mill black plates sourced from the North Asia region.

Earnings strained by commodity prices. The progressive rise of tin prices since last year has caused significant cost pressures. In spite of the higher production cost, the group limited its mark-up rate with intentions to keep their pricing competitive to clients amidst a great supply influx from foreign players which is suppressing gross margin. In the recent 1Q18 results, revenue increased to RM237.5m (+35% YoY) but recorded a steep decline in gross profits to RM7.6m (-62% YoY) due to the abovementioned reason. The poorer margin dragged 1Q18 net earnings to RM2.8m (-76% YoY).

Trimming the rough edges. As the market continues to be highly competitive and while keeping price increases at minimal levels to protect market share, the group aims to seek other avenues of securing its bottom-line through better economies of scale and production capacity in both its local and Vietnam plants. The group is looking to dedicate c.RM20.0m capex/year to upgrade its existing facilities. Management anticipates this could improve capacity by c.10% in FY2018. Furthermore, forex hedging practices are in place to mitigate large unfavourable fluctuations in the short term.

Large cash reserves to brace the storm. The group has consistently maintained a net cash position since FY14 and recently recorded 1Q18 net cash of RM42.7m. Backed by this healthy position, we believe the group is capable of seeing through on its expansion plans while also allowing further room to sustain the low margin environment before eventually resorting to a price increase to keep cash afloat.

Going forward, we project FY18/FY19 sales to register at RM919.6m/RM955.5m (+9%/+4% YoY) driven by increase in volume sales and average selling prices but expect net profits to record at RM32.1m/RM56.4m (-42%/+70% YoY) due to the above challenges while better commodity prices and more efficient production methods could potentially materialise by FY19. While the group has no formal dividend policy, its historical pay-out ratios have on average lingered at c.75%. We estimate a slightly conservative pay-out ratio of c.70%, which translates to 23.0 sen/39.0sen dividends at 3.8%/6.4% yields.

Not Rated with a fair value of RM6.05, ascribing a 11.0x PER on FY18E EPS of 56.8 sen (based on its 5-year Fwd. average PER), which we believe is fair as it is closely in line with FBMSC’s 11.6x. While outlook appears dim in the short term, we believe its potentially high FY19 dividend returns of 6.4% may garner the interest of yield seeking investors to accumulate on weakness.

Source: Kenanga Research - 15 Aug 2017