Background

Zantat Holdings Bhd (ZANTAT) is one of the prominent high-grade Calcium Carbonate (CC) powder and CC dispersions product manufacturers in Malaysia.

IPO Statistic

The IPO entails a public issue of 56.0mn new ordinary shares and an offer for sale of 16.8mn existing shares at an IPO price of RM0.25/share. This collectively account for 26% of the group’s enlarged issued share capital.

Public Issue:

• 14.0mn new shares for application by the Malaysian public;

• 11.2mn new shares for application by eligible parties; and

• 30.8mn new shares for private placement to selected investors.

Competitive Advantages and Investment Highlights

1. Abundant limestone reserves for a broad market reach;

2. Geographically well-covered; and

3. Established track record in the production and export of CC products with a wide and resilient client base.

Valuation

At an IPO price of RM0.25/share, ZANTAT is priced at a trailing PER of 12.9x FY22 core EPS of 1.9sen. We value the company at 9x CY25 EPS, arriving at a fair value of RM0.31/share. Not Rated.

Business Overview

ZANTAT, a Malaysian-based investment holding company, specialises in the production of calcium carbonate for industrial applications. The group is also engaged in manufacturing kaolin dispersion, processing ultrafine precipitated CC (PCC) powder, trading other industrial minerals, and selling limestone quarry products. Its clientele comprises key players in the plastic, rubber, latex, PVC pipe, and cable manufacturing industries, and etc. Production primarily takes place at ZANTAT's facilities located in Kuala Lumpur and Ipoh, serving both domestic and international markets. Notably, as of 9MFY23, 68.1% of ZANTAT's revenue was generated from overseas sales, with India emerging as its largest export market.

Competitive Advantages and Investment Highlights

1) Abundant Limestone Reserves for a Broad Market Reach

ZANTAT owns two parcels of land containing substantial limestone reserves, expected to sustain operations for the next 50 years. Limestone serves as a crucial ingredient in the production of precipitated calcium carbonate, extensively utilised as a filler to replace costly raw materials or enhance the properties of end products. Consequently, ZANTAT's future business growth is poised to benefit from robust demand across diverse industrial sectors for calcium carbonate products. This aligns with its strategic objective of moving up the value chain of CC to achieve higher profitability margins.

2) Geographically Well-covered

ZANTAT has successfully expanded its footprint into 19 countries, fostering strong relationships with majority of its customers. Approximately 70% of the group's revenue is derived from overseas sales, with India emerging as the primary contributor. As the largest global importer of CC, India primarily relies on Malaysia for its CC supply, followed by Egypt, Jordan, Vietnam, and Taiwan. However, disruptions in logistics along the Red Sea have resulted in reduced supplies from Egypt and Jordan. Consequently, India may seek to increase its demand from alternative suppliers to fulfil its requirements.

3) Established track record in the production and export of CC products with a resilient client base

Since its inception in the CC business 38 years ago, ZANTAT has solidified its brand presence with its flagship products, establishing a significant business footprint both domestically and internationally. The consistent revenue generated from its loyal clientele underscores the enduring relationship between ZANTAT and its customers, presenting a prime opportunity for the company to leverage with the introduction of new bioplastic compounding products. This product is slated for commercialization by 1QCY24.

Key Risks Relating to Business and Industry

1) Heavily dependent on India’s market and certain key customers;

2) Business operations are subject to the validity of licenses, permits and approvals;

3) Profitability will be impacted by the fluctuation of logistic and raw material costs; and

4) Interruption arising from unexpected machinery failures or natural disasters.

ZANTAT's FY21 results posted a revenue growth of 11.4%, primarily driven by heightened average selling prices of ground CC (GCC) products owing to elevated sea freight rates, alongside increased sales volumes of kaolin dispersion, spurred by rising demand from the glove sector. However, FY22 revenue declined by 5.4% YoY, attributed to reduced sales volumes for GCC, CC dispersion, and kaolin dispersion, particularly from customers in India and Malaysia. Apart from the revenue contraction, the GP margin and net margin took a hit as well, decreasing to 46.1% and 4.8%, respectively in FY22, mainly due to escalated stearic acid and logistics costs following the surge in sea freight rates. As a result, ZANTAT’s net profit declined 17% YoY to RM5.4mn in FY22. Nonetheless, for the FPE2023 ended-September, net profit and net margin rebounded, reaching RM5.7mn and 6.2%, respectively, thanks to decreased selling and distribution expenses and lower freight costs stemming from easing sea freight rates.

Going forward, we estimate that ZANTAT’s core net profit will register a growth of 29%/10.4%/21.6% to RM7.0mn/RM7.7mn/RM9.4mn for FY23/24/25F, respectively, in tandem with revenue growth as a result of higher production capacity amidst the stabilising freight costs and input expenses.

Future Plans and Business Strategies

The Group’s Future Plans and Business Strategies Are as Follows:

1) Purchase of new machinery and equipment

A budget of RM6.2mn from the IPO proceeds will be allocated towards upgrading ZANTAT's R&D facilities and acquiring new automated machinery to enhance operational efficiency. This strategic investment enables the group to allocate resources more effectively towards expanding its product range while reducing dependence on manual labour at the operational level. Additionally, ZANTAT is set to install a new GCC production line to produce fine-grade GCC, known as the "Zancarb" series, with operations expected to commence by the end of 2024. This new production line is projected to increase the existing production capacity by 8% on top of the existing full production capacity of 311.5kT, further strengthening ZANTAT's position in the market.

2) Expansion into bioplastic compounding

ZANTAT has obtained the "OK compost INDUSTRIAL" certification for its innovative bioplastic compound, specifically the compostable packaging film, showcasing its commitment to environmental sustainability. With plans for commercialization anticipated by 1QCY24, ZANTAT aims to market these bioplastic compounds to plastic product manufacturers across Malaysia, India, Indonesia, and Singapore, offering comprehensive green solutions. This certification underscores ZANTAT's dedication to provide environmentally friendly alternatives, in line with the growing demand for sustainable materials in various industries.

Outlook

ZANTAT’s outlook remains robust and positive, driven by the pivotal role of calcium carbonate playing a pivotal role in diverse industries. According to an independent market research report prepared by Vital Factor Consulting, as enclosed in the IPO prospectus, factors influencing the calcium carbonate industry include the overall health of domestic and global economies, which drive consumption and foster growth in manufacturing sector. In 2023, Malaysia's real GDP expanded by 3.7%, with the manufacturing sector registering a 0.7% growth. Forecasts for 2024 estimate Malaysian GDP growth between 4.0% and 5.0%, accompanied by a 4.2% growth in the manufacturing sector. Notably, India emerged as Malaysia's largest calcium carbonate export destination in 2022, comprising 40.9% of total exports. The robust performance of India's economy, expected to grow by 7.3% in 2023/24, alongside significant growth in key manufacturing sectors like plastics and rubber, could benefit the calcium carbonate manufacturers in Malaysia, including ZANTAT.

Balance Sheet

On a pro forma basis, post-listing with utilisation of IPO proceeds, the balance sheet is expected to improve from a net debt position of RM3.5mn (net gearing level of 0.05x) to a net cash position of RM9.2mn.

Dividend Policy

ZANTAT currently does not have a formal dividend policy. However, we anticipate that the company will declare a dividend payout of 15% of its net profit for FY24 and FY25, in view of its resilient financial performance and steady business expansion.

Valuation

At an IPO price of RM0.25/share, ZANTAT is priced at a trailing PER of 12.9x FY22 core EPS of 1.9sen. Currently, there is no listed company on Bursa Malaysia that is directly comparable with ZANTAT. Nevertheless, we reference Malaysia Smelting Corporation Bhd, an integrated tin mining and smelting group listed in Malaysia, for peer comparison. We assign a target PER of 9x against ZANTAT’s CY25 EPS of 3.4sen and arrive at a fair value of RM0.31/share. This is after considering the group’s robust EPS growth in the next two years and its strategic advantage of leveraging abundant limestone reserves amid stabilising raw material costs. Not Rated.

Source: TA Research - 12 Mar 2024