Muda may have just found its sweet spot

This article first appeared in The Edge Malaysia Weekly, on March 5, 2018 - March 11, 2018.
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PAPER miller Muda Holdings Bhd may have just found itself in a sweet spot that would be considered ideal for any manufacturer — it is seeing low input costs amid higher selling prices.

Last week, the company announced its best set of results to date. For the financial year ended Dec 31 last year (FY2017), net profit more than doubled to RM58.77 million from the year before, while revenue rose 19% to RM1.45 billion.

This was mostly driven by the performance of its fourth financial quarter (4QFY2017) when net profit doubled to RM35.97 million while revenue surged 25% to RM451.95 million.

After it released its results, Muda’s share price almost hit limit up, reaching an intraday high of RM2.19 on Wednesday and charting a gain of 29.6% compared with its closing price a day earlier.

Muda deputy managing director Datuk Lim Chiun Cheong attributes the company’s strong performance partly to developments in China. Recall that paper prices in the country surged early last year due to an increase in the price of waste paper and wood pulp, as well as rising environmental concerns that led to the shutdown of some of the small to medium-sized paper mills there.

Later, in July, the world’s second largest economy imposed tougher criteria on the import of waste paper to curb toxic waste being imported into the country. This led to the closure of smaller paper mills and resulted in a surge in the selling price of paper, which impacted the paper industry.

“The restrictions on imports of waste paper in China led to the paper mills there only being able to source locally for waste paper, which is a raw material in the paper industry. This led to the shooting up of local waste paper prices and consequently, the higher selling price of the final paper product.

“China plays a major role in Asian markets, so when there is an increase in the selling price of finished products there, paper prices in Malaysia and other neighbouring countries will also be affected,” Lim tells The Edge.

Muda, for example, had to increase the price of one of its core products last year, from RM1,600 per tonne to RM2,300 per tonne — a 44% increase.

Paper and corrugated box manufacturing are Muda’s two core businesses. About 30% of the corrugating medium and test liner produced by its paper mills is for the consumption of its corrugating plants.

The effects of the increase in the selling price of Muda’s products were only reflected in its 4QFY2017 financials, says Lim.

“From the beginning of last year, the price of waste paper, which is our raw material, has been going up. If you look at our financial performance in the first three quarters of last year, we did not do so well as the effect of the increase in the price of raw materials is immediate but it takes time to negotiate with customers for hikes in the selling prices of our final products.

“So, the impact from the higher selling price lagged behind the higher raw material price for the first three quarters of last year. For our paper mills and corrugating plants, the impact of higher selling prices was only seen in the last quarter of the year,” he says.

In 4QFY2017, the price of waste paper came off its high, contributing to Muda’s good performance.

The company sources 85% of its waste paper locally, while 15% is imported.

As for pulp prices, Lim says Muda is not as affected by any movement as only 5% of its products are produced from pulp. Only the production of the group’s MG Paper involves the use of pulp.

On whether the company can sustain its performance into 2018, Lim says it is too early to say. “So far, prices of finished goods and waste paper have been stable … things are ‘so far so good’ this year.

“A challenge that we are facing this year is the stronger ringgit against the US dollar, which may impact exports as any drop in the export numbers would have an adverse impact on demand for packaging.”

Meanwhile, the stock is a relatively cheap buy compared with its regional peers. Muda is trading at a historical price-earnings ratio of 10.9 times compared with Indonesia’s PT Pabrik Kertas Tjiwi Kimia Tbk’s 79.2 times, China’s Shandong Sun Paper Industry Joint Stock Co Ltd’s 17.4 times and Taiwan’s Chung Hwa Pulp Corp’s 20.9 times.

Muda’s largest shareholders are its key management, which includes Lim, his father Tan Sri Lim Guan Teik (chairman), his uncle Datuk Lim Wan Peng (executive director) and managing director Datuk Azaman Abu Bakar. Collectively, they own 41% of the company.

Its other substantial shareholder is Penang-based stationery player Asia File Corp Bhd, which has a 20% stake in the company.

At its close of RM2.03 last Friday, Muda had a market capitalisation of RM619.3 million.


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