This article first appeared in The Edge Financial Daily, on November 25, 2015.

Perusahaan Sadur Timah Malaysia Bhd

PERSTIMA (Fundamental: 2.35/3.0, Valuation:2.4/3.0) was first featured as InsiderAsia’s Stock of the Day back in June this year and has since rallied 29.5%, closing RM5.31 yesterday.

Its 2QFYMar2016 results was released in October, showing good earnings traction — despite a competitive operating environment. Sales were up 4.9% y-y while net profit rose an outsized 78%. 

The improved margin was due, in large part, to the stronger Vietnamese Dong against the ringgit. Vietnam accounted for roughly 36% of total sales in 1HFY2016. Whilst domestic operations saw lower selling prices, volume demand increased. Perstima has two factories, in Johor and Vietnam, with a total annual production capacity of 200,000 MT. 

We continue to favour Perstima for various reasons. Its broad-based customers should offer a degree of resilience — tinplate products are used to package liquid milk, processed food, dry food, paint, motor oil, beverage and edible oil, amongst others. 

It generates strong free cashflow annually. Net cash has grown from RM36 million in FY2011 to RM95 million currently. 

In line with the stronger earnings and balance sheet, annual dividends were raised from 30 sen per share in FY2011-FY2013 to 35 sen per share in FY2014-FY2015. For 1HFY2016, dividend was raised further to 18 sen per share from 15 sen in the previous corresponding period. We estimate an above market average net yield of 7.2-7.5% for the full-year.

The company’s ROE and ROA averaged around 11% in the past four financial years. Valuations remain modest. Trailing 12-month P/E is less than 10 times at prevailing prices and only 8.3 times if we were to exclude its cash pile.

The stock offers investors a cheap alternative for exposure to the packaging industry — compared with downstream tin can manufacturers such as Kian Joo, Can-One and Johore Tin, which trades at 10.4 to 13.3 times earnings.