Investment Merits

• Acquisition of FMU5 a game-changer

• Superior-yielding forest with extensive logging equipment

• Listing of subsidiary on SGX to capture foreign interests

Company Profile

Priceworth International is primarily involved in sustainable timber harvesting and manufacturing and sale of plywood. Priceworth has been in the timber industry since 1992, before it was listed on Bursa Malaysia in 2001.

Highlights

A transformative acquisition. PWI acquired 101,161ha of forest management unit (FMU5) in Trusmadi, Sabah, via its wholly-owned Singapore subsidiary, GSR Pte Ltd. The MYR260m acquisition, which was completed in Oct 2016, enabled PWI to transform into a fullyintegrated player and to fully optimise its existing operational capacity. Prior to the acquisition, PWI had a 50-year concession of over 28,000ha, also located in Sabah. Current utilisation rate of its plywood manufacturing plant is estimated at only 40% due to a shortage of sustainably sourced logs. We forecast this rate to increase to 70% in FY18 (Jun) before ramping up higher, due to its ample source of logs available with its new acquisition.

A virgin forest. On FMU5 logging activities have been rare due to the steeper terrains in the area, which posed difficulties in logging operations by the previous owner. However, PWI has an extensive set of logging equipment which enables it to employ the reduced impact logging (RIL) method of extraction. This allows for a maximum volume of logs to be extracted, with minimum damage to the logs. Based on a Forest Resource Appraisal Report on FMU5, the forest has a potential productivity of up to 111.3cu m per ha for trees which are above the 40cm diameter at breast height (dbh) – the limit at which cutting is fixed at. Our forecasts have been much more conservative as we have only inputted a yield of 70 cu m per ha for an allowable annual area (AAA) of 8,000 ha per year over a 10 year cutting cycle.

Listing of GSR on the SGX. Management has plans to list its whollyowned GSR unit in Singapore, with an estimated completion by 1HFY18 and a target market capitalisation of MYR800m. The newlyacquired FMU5 as well as Sinora, the group’s plywood manufacturing unit, is to be injected into the Singapore entity. PWI intends to retain 75% stake in GSR post IPO.

Company Report Card

Latest results. PWI reported 1HFY17 net profit of MYR1.3m vs its FY16 earnings of MYR0.7m. We assumed no contribution from FMU5 for the fiscal year ending in June. There is therefore upside potential to our earnings projection for F17F should PWI be able to commence logging activities starting in March as expected.

Balance sheet/cash flow. The group announced various proposals to fund the FMU5 acquisition, namely a: i. Private placement of c.64.2m shares that raised MYR6.4m (completed) ii. Special issue of ~141.2m shares which could raise MYR14.1m. The funds collected from these transactions would be used to fund the MYR20m deposit payment for the acquisition. The remaining MYR240m is to be funded via the issuance of PWI shares (MYR60m) and via the listing of GSR in Singapore (MYR180m). Subsequently, the group plans to undertake a 2-for-1 two-call rights issue of around 1.69bn shares, with one bonus share for every two rights share to raise MYR84.7m. This would be used to pare down its borrowings. We assume all of these corporate exercises to be completed by FY17. Post completion of these exercises, we expect the group’s net gearing to fall to 0.18x (from 0.68x at the end-FY15).

Dividend. The group has not paid any dividends historically. However, management has guided that they are looking to introduce a dividend policy in order to reward shareholders going forward. Our forecasts have assumed no dividend payments.

Management. Mr Lim Nyuk Foh is the founder and managing director of PWI. He has extensive experience in the timber industry spanning over 28 years. He is assisted by Mr Koo Jenn Man who has served as an executive director at PWI since 2011. Mr Koo is tasked to oversee the financial and administrative operations of the group.

Recommendation

We like PWI for its growth story arising from the acquisition of FMU5, which represents a turning point for PWI. This is as earnings are expected to grow from the current MYR1-2m pa to approximately MYR112m by FY18. We value PWI at MYR0.26 based on 8x F18F P/E. Our target multiple is at 38% discount to its peers’ average of 13x, a discount that we think is justified given: i. Its smaller plantation acreage; ii. Execution risks; iii. The lack of track record (in terms of forest management). A key risk to highlight is that, at the time of writing, the sales and purchase agreement (SPA) has not been signed. While management guided that this would be completed before end-FY17, failure to obtain the agreement could result in the group not being able to commence its logging operations.

Source: RHB Securities Research - 5 May 2017