Tuesday, July 5

Asia File to replicate UK success in Europe as efficiencies improve

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KUCHING: Asia File Bhd (Asia File) is poised to enter the next stage of growth by replicating its UK success story in Europe now that its economies of scale and operational efficiencies are gradually coming to fruition.

According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), Asia File is already a leading player in the dividers & indices category in Europe, and thus sees great potential in its plans to expand its product categories to include Lever Arch Files in the continent.

Its investment in Muda Holdings Bhd (Muda), purchased in 2008 for RM44.5 million, would also serve as an additional kicker.

This is because Asia File’s 20 per cent stake in the company is trading at a market value of circa RM106 million and could be sold to provide funding for a few more sizable acquisitions in Europe, if not being paid out as special dividends to shareholders.

In terms of its first nine months of 2014 (9M14) results, Kennaga Research noted that in the recently concluded corporate earnings season, Asia File had reported an impressive third quarter of 2014 (3Q14) net profit increase of 49 per cent year on year (y-o-y).

This had brought the group’s 9M14 net profit to RM46.1 million.

The research arm highlighted that this set of results far exceeded expectations, at 87 per cent of its full-year forecast, with the strong numbers underpinned by improved sales (19 per cent y-o-y) through its strengthening position in Europe and favourable exchange rates for British pound and euro, coupled with greater economies of scale and operational efficiency, which led to a 2.3 percentage point (ppt) earnings before interest and taxes (EBIT) margin expansion.

With the inflection in its earnings trend after a few challenging years, it noted that Asia File has begun to garner investors’ interest.

“In fact, Asia File’s share price has gained handsomely by 68 per cent since our ‘trading buy’ recommendation just three months back,” it added.

The research arm further noted that the stellar gains represent a stark outperformance over the benchmark FBMKLCI which had instead lost 1.4 per cent from 1,843 to 1,817 points over the same period.

“Even so, we believe that there still is more value and further upside to the stock post our meeting with the management,” it opined.

In terms of mergers and acquisitions, Kenanga Research highlighted that Asia File has been on an acquisition spree since the global financial crisis in 2007 with notable purchases, including original equipment manufacturer (OEM) dividers and indices manufacturer in Germany, a paper mill and the number one file manufacturer in the UK, as well as manufacturing equipments from leading manufacturers in France and Czech Republic.

“Through these acquisitions, not only has Asia File been able to open up new markets, but also create an environment where there are fewer competitors with less intense pricing pressures.

“More importantly, Asia File now has full control of supply and distribution chain management, which provide added cost advantages and operational efficiency,” the research arm noted.

Overall, post 9M14 results, it is increasing its revenue growth and EBIT margins assumptions to take into account the increased contributions from new market segments, better gross profit margins and increased operating efficiency.

These resulted in the research arm’s financial year 2014 to 2015 estimate (FY14 to FY15E) net profit forecast being revised up by 18.2 per cent to 25 per cent to RM63.1 million to RM76.6 million.