Smart Asia Chemical (SMART, 0306) is set to make its debut on Bursa Ace Market today. SMART is a home-grown manufacturer and distributor of paints and coatings, best known for its largest house brand, 'Smart Paints'. We expect earnings growth in excess of 20% over the next 2 years driven by, (i) 3-fold increase of its manufacturing capacity with the commencement of the new Perak plant; (ii) enlargement of its distribution network; (iii) expansion of retail touchpoints by setting up a 66% increase of Smart Colour Pos Tinting Machine. BUY with a FV of RM0.49 based on 13x over FY25 EPS, a 30% discount to its peers’ average of 18x PE due to its smaller market capitalisation.

Backed by a solid 12-year track record, SMART is supported by a network of 9 wholesalers and 937 dealers across Malaysia, as well as 14 authorised distributors overseas. The group has also established Smart Colour POS Tinting Machines in 381 retail hardware stores since 2013.

Contributions from its manufacturing segment which enjoys higher margins has grown from 75% in FY20 to 94% in FY23 and is expected to grow further with the commencement of the Perak plant by 2Q24 and tripling its annual manufacturing capacity from 8.7m litres to 27m litres. We believe this new Plant will be its growth engine, underpin by (i) 3-fold capacity expansion; (ii) automated paint production system to minimize labour usage and wastage; (iii) industrial tinting system to yield higher margins and garner more orders; (iv) proximity to calcium carbonate sources to reduce production lead time.

In tandem with its upcoming Perak plant, SMART also aims to strengthen its sales and marketing force by (i) appointing wholesalers in Pahang and Penang; (ii) expanding warehouse facilities by 4Q24; and (iii) adding 10 sales personnel, all of which are targeted to secure 800 new dealers and 4 additional ODM customers over the next 3 years.

SMART intends to utilise RM5m from its IPO proceeds to purchase additional 250 sets (up 66%) of Smart Colour POS Tinting Machine between 2024 to 2026, to be distributed locally. This will further boost the group’s brand recognition and sales, as these devices help to mix and dispense colours accurately without the need to store large inventories of coloured paints.

As of 1QFY24, SMART’s balance sheet remains manageable with a net gearing ratio of 0.5x. The group does not have any dividend policy at this juncture.

Source: Rakuten Research - 28 May 2024

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