This article first appeared in The Edge Financial Daily, on november 24, 2015.
Advanced Packaging Technology Bhd
Relative to its larger peers, flexible packaging manufacturer Advanced Packaging Technology Bhd (APTB) (Fundamental: 2.5/3, Valuation: 2/3) has been a laggard this year. The low-profile stock is down 2.3% year-to-date (YTD) while its competitors, Daibochi Plastic & Packaging Industry Bhd and Tomypak Holdings Bhd, are up 81.7% on average.
The divergence in performance could be because APTB’s revenues are mostly derived domestically. As such, it does not benefit from US dollar-denominated exports.
Nevertheless, we like APTB as it is valued at an undemanding Enterprise Value to EBITDA ratio of 5.9 times and yields an attractive 5%. The company is fundamentally appealing — net cash and equivalents total RM16.4 million, which equates to 42.7% of market capitalisation.
In addition, depressed crude oil prices favour APTB as its raw materials are derivatives of the commodity. YTD, Brent crude is down 32.7% to US$44.5 per barrel due to a global supply glut. That being said, the weakening ringgit will result in higher raw material costs for APTB but this has been outweighed by slumping crude oil prices so far.
Moving forward, resilient domestic demand for food and beverage (F&B) products should underpin APTB’s earnings. The company’s high quality packaging materials are used in F&B products like snack foods, instant noodles, sweets and confectionary, liquid condiments and frozen foods. APTB also manufactures packaging materials for medical and surgical products. As such, it also offers a much cheaper exposure to the F&B and medical sectors, which are both faring well.
For 1H2015, net profit grew an outsized 59.8% to RM1.7 million on the back of a 7% rise in revenue to RM13.9 million. The improved margins were primarily due to lower raw material prices, which take up as much as 60% of its revenue.
Although expansion plans do not appear to be in the works, APTB’s strong balance sheet and generous dividends make it an ideal defensive pick.