Pelikan International Corp Bhd
(Feb 5, RM1.09)
Trading buy with unchanged target price of RM1.55: While the price performance of Pelikan seems lacklustre, we still believe it is an unpolished gem and will soon be in the limelight after the completion of its corporate restructuring. It is injecting its core stationery sales and distribution assets into 70.9%-owned subsidiary Herlitz AG (HAG).
Post restructuring, the group may repay RM150 million bank borrowings from the RM462 million proceeds. This should see RM6 million interest savings at Pelikan level in financial year 2015 (FY15).
Meanwhile, RM182 million is allocated for product innovation and development of new sales and distribution channels to penetrate new markets. The above mentioned amount also includes advertising and promotion (A&P) expenses to enhance the branding of both Pelikan and Herlitz brand names.
The remaining RM165 million or 30 sen per share from the proceeds will either be utilised as extra working capital to allow Pelikan to reorganise or strengthen its remaining businesses or to reward shareholders, say, via a generous dividend.
Paul Poh Yang Hong, who is said to be a long-time associate of tycoon Tan Sri Quek Leng Chan, has emerged as a substantial shareholder of Pelikan with slightly more than 5% equity interest via his investment vehicle Caprice Capital International Ltd.
The European Central Bank has launched a landmark bond buying programme from March 2015 until end-September 2016. This quantitative easing (QE) programme has boosted European equity markets and is expected to strengthen consumer sentiments.
As such, HAG’s prospects seem bright and we do not rule out HAG commanding a better-than-expected valuation, leading to higher estimated proceeds for Pelikan from sale and private placement of new shares of HAG, due to stronger investment sentiments.
Note that the Deutsche Boerse AG German Stock Index (DAX) is trading at less than 18 times 12-month trailing price-earnings ratio (PER) which is higher than its historical end-2014 PER of 16.5 times.
Nonetheless, these positive factors could be capped by translation loss in currency arising from weakening of the euro against the ringgit.
Having said that, we are not overly concerned and maintain our earnings estimates pending the forthcoming fourth quarter of FY14 results as we believe the share price performance of Pelikan is likely to be driven by its corporate exercises, such as listing and placement of HAG and disposals of other non-core assets such as the printer consumable business.
Our rating is premised on earnings returning to the black following the successful business rationalisation, injection of core stationery business into HAG which unlocks the value of the assets while strengthening its balance sheet, huge cash piles from asset injection to be utilised for the development of its stationery business and potential gain on disposal of its non-core assets, which carry zero or low value in its balance sheet. — Kenanga IB Research, Feb 5
This article first appeared in The Edge Financial Daily, on February 6, 2015.