Prolexus Bhd
(Oct 17, RM1.60)
Initiate buy with a fair value of RM1.84: We believe Prolexus Bhd deserves to trade at a premium due to its superior margins and potentially higher profit growth underpinned by its expansion plans in Vietnam. Prolexus’ five-year price-earnings band ranges from a low of 1.4 times to a high of 13.8 times.

Prolexus is an emerging original equipment manufacturer sportswear player in Malaysia. The group’s core business is in the manufacturing and sales of sportswear. Prolexus has factories in Penang and Johor in Malaysia as well as in China.

We are positive on Prolexus’ expansion plans in Vietnam as this will boost its production capacity to meet the growing demand for premium athletic wear. The group would also be able to expand its customer base.

We expect Prolexus to continue benefiting from increased orders from key customers, namely Nike, Under Armour and Asics. We understand that more than 90% of the group’s total sales are attributed to its key customers. About 65% of its sales for the year ended July 31, 2015 (FY15) were from Nike and another 25% were from Under Armour.

Margin enhancement is expected to come from the new knitted fabrics, which are produced in-house instead of being sourced externally. Prolexus will be able to reduce its production costs and improve its net margin. Knitted fabrics are one of the key materials in apparel production.

A portion of knitted fabrics produced by the new mill are envisaged to be sold to external parties. This is expected to provide an additional source of revenue for Prolexus in the future.

We estimate Prolexus’ revenue to grow by 14% to RM457 million in FY17, underpinned by strong orders from key clients such as Nike and Under Armour. Prolexus’ sales growth in FY18 is also anticipated to be aided by external sales of knitted fabrics.

We forecast earnings to rise by 13% from RM32 million in FY17 to RM36 million in FY18, and by 14% to RM41 million in FY19, supported by higher top-line growth. To be conservative, we predict its earnings before interest and tax margin to be flat at 9.5% in FY17 and FY18, compared with 10% in FY16.

We forecast Prolexus’ gross dividend per share at 3.7 sen in FY17, which implies a yield of 2.3%. Prolexus’ balance sheet is anticipated to remain healthy in spite of the capacity expansion plan. — AmInvestment Bank, Oct 17