This article first appeared in The Edge Financial Daily on September 24, 2018

KUALA LUMPUR: Muda Holdings Bhd expects to register another record profit this year, thanks to the continued healthy demand for packaging and paper on the back of reasonable and stable selling prices.

“Barring any unforeseen circumstances, this year’s full-year performance will be better than last year’s,” group managing director Datuk Lim Chiun Cheong told The Edge Financial Daily.

The group is, however, cautious about the market situation next year mainly due to the trade tensions between the US and China, which may lead to uncertainties in the global economy and slower demand in China.

Lim said the trade tensions may affect the group’s sales of corrugated packaging products. “In Malaysia, a lot of semi-finished goods are sold to China, and from there they pack and sell them as finished goods to the US,” he said.

“Also, now that the domestic demand [in China] has reduced, paper prices in countries such as South Korea and Japan are declining,” said Lim, explaining that the slowdown in paper demand from China has resulted in other countries such as Japan, South Korea and Indonesia having excess supplies of paper, resulting in a price war in the region.

The group is also cautious about its 2019 performance due to changes in the tax regime. The group has yet to determine the exact impact of the expected 10% sales tax on its paper products.

Muda Holdings’ net profit more than trebled to a record RM58.77 million for the year ended Dec 31, 2017 (FY17), from RM18.81 million in FY16, helped in part by the recognition of a compensation from its insurer.

Revenue grew 18.94% to RM1.45 billion from RM1.22 billion on the back of higher demand for paper packaging products and a rise in the selling price which offset higher raw material costs.

The record earnings had a favourable impact on Muda Holdings’ share price, which rose to an all-time high of RM2.80 on May 21. It has since pulled back, closing at RM1.79 last Friday, at which level it is still 32.3% higher that its year-ago price of RM1.35. This brings the group’s market capitalisation to RM546.04 million.

For the first half of FY18, the group’s net profit grew 22.08% to RM27.19 million, from RM22.27 million a year ago, due to lower cost of waste paper and higher selling price of industrial paper, coupled with better selling price of paper packaging products. Revenue was up 12.88% to RM725.41 million, from RM642.63 million.

For the second half of FY18, corrugated packaging sales are expected to rise from September as customers begin to prepare for the Christmas season, coupled with higher trading sales in Singapore in preparation for the back-to-school period.

Lim said the paper business contributes about 60% of the group’s revenue while the remaining 40% is from carton. In terms of markets, 88.34% of the sales takes place locally, while the remaining is from Singapore (9.69%), China (1.64%) and Australia (0.33%).

He said the group’s sales in Singapore in FY18 is expected be the same as FY17. Muda Holdings sells school books, uniforms and stationery, besides operating school and online bookstores, in Singapore. “We operate about 150 primary and secondary schools’ bookshops, and 80% of the sales only come in at the end of the year,” he said.

Lim said Muda Holdings’ main focus in FY19 will be to keep its costs as low as possible. Hence, no major expansion or capital expenditure (capex) has been planned for the year, although the group may allocate a small investment of up to RM5 million for automation.

For FY18, Muda Holdings has allocated a capex of RM104 million, mainly for capacity expansion and efficiency improvements due to higher sales.

“The expansion of our paper mills and corrugated carton plants’ production capacity is to cater for the anticipated increase in sales in the future,” said Lim.

Of the total RM104 million, around 10% relates to the construction of a new factory in Air Keroh, Melaka, and the main bulk is for the installation of new corrugating machines in Melaka and Johor Baru as well as minor capacity expansion for a paper mill in Penang.

Following the recent completion of the paper mill expansion in Penang, Muda Holdings’ paper mills have a production capacity of 500,000 tonnes a year, while the group’s corrugating plant capacity is expected to increase to 270,000 tonnes a year upon the completion of the two machines in Melaka and Johor Baru, which will then raise its market share in the paper packaging industry in Malaysia to as much as 28% from 13%, said Lim.