This article first appeared in The Edge Financial Daily on December 7, 2018

Asia File Corp Bhd
(Dec 6, RM2.55)
Upgrade to hold: Asia File Corp Bhd’s revenue continues to underperform in the second quarter of the financial year ending March 2019 (2QFY19), dropping by 4.8% year-on-year (y-o-y) to RM83.5 million from RM87.7 million in 2QFY18. This was mainly attributed to softer sales from the UK paper mill as management moves away from low-margin items to focus on higher-margin products. The quarter’s performance was within our expectations. We expect no growth from the existing business before the introduction of disposable foodware business.

Operating profit fell marginally by 4.4% to RM16.2 million in 2QFY19 in line with lower revenue recorded in the quarter. However, operating margin was above our expectations, achieving a two-year high of 19.4% versus 9.6% in 1QFY19, as most of the price increases in material costs have been passed down successfully to customers.

Profit before tax, on the other hand, increased by 6.3% y-o-y to RM19.9 million from RM18.8 million in 2QFY18, due to better associate contributions, which was partially offset by a less favourable exchange rate (lower foreign exchange rate gain of RM1 million compared with gain of RM1.9 million in 2QFY19). Note that both the sterling and euro have weakened by 4.6% and 3.2% against the ringgit when compared to 2QFY18.

Asia File maintained a single-tier first interim dividend of three sen per share with entitlement date to be determined later. We expect the company to sustain its payout of 15 sen per share, given its large net cash position of RM174.3 million. This will translate into an attractive yield of 6% at the prevailing share price.

Management updates that the new disposable foodware business is starting to gain traction as it is able to gradually penetrate the market by selling at competitive prices. However, we only foresee contributions starting in FY20. Overall, we expect the group to sustain its performance going into second half of FY19, due to stable paper prices and successful cost pass-through. The stock is currently trading at a forward FY19 price-earning ratio of 9.8 times, which we deem fair for a traditional stationery business. Thus, we upgrade to a “hold” call and revise our earnings forecast to account for a better operating margin. — Asia Analytica, Dec 5