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Undemanding valuation for its core businesses. Stripping out the net cash of RM73m, the existing core businesses are only valued at a 7x PE multiple, which is not justifiable considering i) its steady earnings margin (pre-tax margin: 11%-13%), ii) 60% market share in Peninsular Malaysia and iii) steady operating cash flows.

CENTURY BOND - Pushing The Limits
Author: PublicInvest | Publish date: Fri, 1 Jul 2016, 12:50 PM

We spoke with Century Bond’s management last week and came away with positive guidance over its FY17 outlook. The company managed to sustain its earnings in FY16 despite experiencing cost pressures particularly from rising distribution expenses, a result of improved efficiencies and greater economies of scale from running its plants at an 80%-90% utilization rate. Completion of the Lafarge–Holcim merger has benefited the company through the securing of more orders from the enlarged entity, increasing its production further by 10%-15% in FY17. We are lowering our fair value of the company slightly to RM2.18 (RM2.29 previously) to account for lower cash levels which still stand at an admirable RM73m or RM0.61/share post-payout of a bumper special dividend of 20sen per share in 1QFY16.

FY16 numbers a mixed bag, though generally positive. Revenues inched 2.4% higher YoY, mainly led by stronger overseas sales contribution, up 12.2% YoY which offset a 1.1% YoY drop in Malaysia. Cement paper packaging, which makes up more than 77% of the Group’s earnings, saw contributions fall 14.9% however, while plastics packaging and contract manufacturing packaging showed improvements. Pre-tax margin weakened from 13.0% to 11.8%. Meanwhile, the Group’s net cash level has fallen from RM95.4m to RM73.3m after declaring a 20sen per share special dividend in 1QFY16. A further 3sen per share final dividend, which is subject to shareholders’ approval in the forthcoming AGM, has been proposed recently. Management guided that it will continue to maintain its dividend payout of 30%-50% going forward.

Utilization rate at a high 80%-90%. The Group’s cement paper bag segment has a production capacity of 12m/mth. Attributed to the integration in Lafarge Malaysia and also vibrant construction activities in Thailand and Indonesia, the Group has been receiving more orders for its cement paper bags in recent months. Additionally, some cement producers are also slowly switching from plastic to paper bags which are more environmental-friendly, heaping on the demand. The company is currently running at 80%-90% of its production capacity, almost deemed as full.

Updates on JV tie-up in Indonesia. Given that it’s a new venture for the company, management has adopted an extremely cautious stance, biding its time in sorting out all pertinent issues with its Indonesian partners before embarking deeper into the project.

Undemanding valuation for its core businesses. Stripping out the net cash of RM73m, the existing core businesses are only valued at a 7x PE multiple, which is not justifiable considering i) its steady earnings margin (pre-tax margin: 11%-13%), ii) 60% market share in Peninsular Malaysia and iii) steady operating cash flows.

Source: PublicInvest Research - 1 Jul 2016