MUDA HOLDINGS BHD’s share price has climbed substantially since the start of the year. The stock hit a multi-year high of RM2.40 in late July before retreating to close at RM1.74 last Thursday.

Asia File Corp Bhd, which holds a 20.02% stake in Muda, is a beneficiary of the sharp rise in the paper miller’s share price. The former’s shareholding of 61.08 million shares is worth some RM106.28 million based on the latter’s closing price last Thursday.

The market value of Asia File’s block of Muda shares is more than double the amount it paid in 2008 when it accumulated the shares on the open market as the share price hovered around 80 sen.

The jump seen in Muda could be due to speculation that the company is an acquisition target for foreign paper product manufacturers. But, Muda has yet to announce any concrete plans.

Its controlling shareholder, Tan Sri Lim Guan Teik, and the persons and companies connected to him recently revealed in an announcement to Bursa Malaysia that they “are not selling their equity stakes in Muda”.

Hypothetically, if Asia File were to dispose of its stake in Muda, the paper file manufacturer’s cash pile would swell to some RM180 million, or RM1.54 per share, based on Muda’s share price of RM1.74 and Asia File’s issued capital of 118 million shares.

Analysts say it may be wise for Asia File to sell its stake simply because such a divestment would help it raise fresh capital for the expansion of its paper file business in Europe, where it already enjoys the lion’s share.

Also, they note that there seems to be little synergy between the two companies, although both are involved in paper-based products.

Interestingly, both Asia File and Muda are controlled by Lim and his family. They are the single largest shareholder in Muda with a 41.5% stake while Datuk Lim Soon Huat, son of patriarch Lim, holds 50% equity interest in Prestige Elegance (M) Sdn Bhd, which in turn has 44.44% shareholding in Asia File.

Soon Huat declined to comment on the issue when contacted by The Edge. Apart from the stake he holds in Asia File through Prestige Elegance, his family members are also shareholders in Asia File.

Muda is a pioneer in the paper milling and packaging industry in Malaysia, with its first plant in Penang established in 1964.

Asia File is believed to be eyeing expansion opportunities in Europe. It commands about 60% of the UK file market.

It built up its European business after the global financial crisis, embarking on an acquisition spree from 2007 and taking advantage of the depressed asset prices then.

Some of Asia File’s notable purchases in the continent include a dividers and indices manufacturer in Germany, a paper mill that is the top file manufacturer in the UK, and manufacturing equipment from leading manufacturers in France and the Czech Republic.

Today, Asia File’s European businesses collectively contribute to about 75% of the group’s total revenue, which stood at RM365.9 million in financial year ended March 31, 2014, according to Kenanga Research.

While the UK venture is considered the most successful among Asia File’s European businesses, the group is poised to replicate this success in other parts of the continent, Kenanga Research states in a research report dated Sept 18.

“With economies of scale and operational efficiencies gradually coming to fruition, Asia File is poised to enter the next stage of growth by replicating its UK success story in other parts of the European region (a market four to five times the size of the UK market),” it says.

Although Asia File isn’t a well-known household brand, compared with Pelikan, Faber-Castell and Staedtler, the company’s steady earnings growth in the past few years speak well of its file manufacturing business.

Since the acquisition of its subsidiary in Germany in 2008, Asia File’s top and bottom line have grown tremendously.

In financial year ended March 31, 2008 (FY2008), Asia File’s revenue jumped 57.4% to RM208.4 million, while its profit before tax increased to RM49.26 million from RM39.62 million the year before. Net profit rose to RM40.72 million from RM32.41 million.

Between FY2008 and FY2014 (ended March 31, 2014), Asia File’s revenue rose 75.6% to RM365.88 million, while its profit before tax rose 55.5% to RM76.58 million. Earnings during the period increased 48.7% to RM60.55 million.

For the first quarter ended June 30, 2014, Asia File says its businesses in Europe registered the biggest improvement in terms of sales and were the main driver of its revenue growth of 25.5% to RM104.3 million.

While Asia File’s share price has appreciated 78% over the past year, the rally seems to have lost its steam. After reaching a 52-week high of RM7.50 on Aug 7, the stock lost 7.6% to close at RM6.93 last Friday.

This article first appeared in The Edge Malaysia Weekly, on October 13 - 19, 2014.

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