Asia File

UNKNOWN to many, Asia File Corporation Bhd is the largest player in the local stationery and office supplies market, specialising in making file dividers and indices. It is actually Malaysia's largest integrated stationery and office supplies manufacturer and distributor, commanding 60% of the domestic market share. As an own brand manufacturer (OBM) in the domestic market, Asia File sells its products under the `ABBA' brand name, which is probably where it is better known among the millions of office workers in the country.

And the company has been going global for some time, with the United States and United Kingdom markets making up most of its sales. Over the years, Asia File has expanded its business overseas, which now contributes more than 70% of its revenue, with the two largest markets being the US and Europe (mainly UK). Yet, despite its global reach and strong product demand, the equity market had somewhat lost interest in the stock, with the share price trading range-bound over the last four years at between RM4.00 and RM6.00.

Rumour had it that there were some family disputes in the management of the company, which is controlled by the Lim family now headed by Executive Chairman Michael Lim Soon Huat, and the company had somewhat lost some direction. Profits were still pretty good even then, probably reflecting the resilience of its business, although they were flat at around RM30 million over the same period. However, Asia File is apparently coming back with a bang, having recently acquired one of the larger players in its market in Europe on the cheap.

According to a recent investment report by CIMB Research, Asia File is set to record a strong compounded annual growth rate (CAGR) of 40% over the next three years, as it will be the largest original equipment manufacturer (OEM) in its segment in Europe with the acquisition.

An old hand in the business

Established in 1961, Asia File has been in the stationery business for more than four decades, and today dominates the local industry with a 60% market share. Asia File manufactures and distributes stationery products for both the domestic and export markets and has a vast range of products, the main ones being dividers, lever arch files and ring files, which contribute close to 70% of its current group revenue.

It exports to more than 80 countries, mainly as an OEM and also as an OBM. The largest markets for its products are the UK and the US, which collectively make up more than half of the group’s revenue. Asia File’s manufacturing and headquarters base is in Penang, where the group has a total of three factories, ie, in Permatang Tinggi (200,000sf in size), Bayan Lepas (260,000sf) and Sungai Pinang (60,000sf). Asia File also operates a major warehouse in Puchong in the Klang Valley and in Basingstoke, UK. The average utilisation rate of its factories is said to be 70%-75%, according to CIMB Research.

Listed since 1996

Asia File first got listed in 1996 on the second board of Bursa Malaysia before upgrading itself to the main board in 2000. The company is currently majority-owned by dominant shareholder, Prestige Elegance Sdn Bhd, which holds 47.2% of the group. Prestige is 50.01% owned by Executive Chairman Lim, who is said to take a very hands-on approach towards the group’s domestic and export operations.

The group has also garnered some institutional support and has a number of large institutional shareholders. These include the Arisaig Asean Fund (14.9%), the NT Asian Discovery Fund (6.2%) and Great Eastern Life Assurance (Malaysia) (3.7%). According to CIMB Research, the foreign shareholding in Asia File is currently at around 22%, which could rise further if investors take note of the fact that the group’s major income actually comes from overseas, mainly Europe.

Major breakthrough in Europe

The new excitement in the group stems from its recent acquisition of Plastoreg (PTG), Europe’s largest OEM manufacturer of indices and dividers. According to an industry observer, Asia File has long been on the lookout to acquire stationery companies in Europe and the US as part of its plans to expand its distribution network in these markets. The breakthrough came recently in September 2007, when it grabbed the opportunity to buy over PTG in an attempt to further tap into Europe’s Euro 20 billion (RM96 billion) stationery market. PTG is an OBM in Europe, selling its products under the `INDX’ brand.

PTG has a long history in the business similar to Asia File. The company is also family-run and started operations back in the 1970s. It has today two production plants in Kirchgandern and Witzenhausen, located on the borders of East and West Germany. Both the plants, which total around 30,000sf, are only 15km apart and only need 48 hours to access major European Union (EU) markets by truck.

PTG’s sales are mainly in Europe, with Germany being its largest market at 41% of its total sales. According to CIMB Research, the company has more than 700 customers, mainly international office supply retailers or promotional ring-binder producers. PTG sells mainly standardised products (70% of sales) while bespoke products make up the balance 30%.

Analysts are mainly positive on the acquisition, noting the fact that outside the UK, Asia File’s revenue from Europe is only 1% of total group sales. For one, CIMB Research notes that while Asia File has successfully penetrated the UK market and is currently one of the top-three players in filing products there, the fact is that it only started making inroads into this market in the past few years despite having been in the UK since the late 1980s. With PTG, Asia File will, in one fell swoop, have an extensive distribution network in Europe and the UK, saving its years of relying on just organic growth.

With PTG in the fold, CIMB Research estimates that the new group will in the future make close to 80% of its sales overseas compared to around 60% currently (see Chart 1).

Attractive purchase price

The acquisition will cost Asia File Euro 13.8 million (RM66.2 million), which analysts say is quite an attractive price for a major European stationery company with an extensive distribution network across Europe. The group has net cash of around RM60 million and hence, it would not be a problem for Asia File to pay for the acquisition, which was expected to be completed by last year.

At the price, CIMB Research estimates that Asia File is buying PTG only at around 5.0x one-year forward price earnings (PE) multiple and at 2.2x price to net tangible assets (NTA). The payback period is expected to be three to five years and with PTG under its umbrella, Asia File is expected to be the world’s largest OEM producer and distributor of indices and dividers, producing close to 1.0 billion pieces annually. It’s, thus, not a surprise that the investment community is taking a re-look at the company.

PTG is also said to be managed very efficiently. The company currently has 130 employees and generates an annual revenue per employee of close to RM1.0 million, 4.0x that of Asia File, says CIMB Research. Its plants are also running at full capacity and have orders for more than six months in advance so much so that PTG is looking to invest Euro 2 million (RM9.6 million) in 2008 to expand its production capacity. In addition, PTG’s key board members and senior management are also expected to remain in the company even after Asia File’s acquisition to ensure continuity in its operations.

Additional synergies?

Apart from an increase in the size of its market for Asia File, there is also apparently synergy in product mix and costs as well. At the moment, PTG only produces dividers and indices whereas Asia File manufactures a host of products like lever arch files, binders, polypropylene products, manila files and paper products. As such, analysts believe that Asia File could easily use PTG’s distribution network in Europe to sell its other products.

CIMB Research thinks that there could also be major cost savings and economies of scale once PTG comes on board. According to the research unit, PTG currently sources its raw material and intermediate products like mylar and polypropylene films from third- party suppliers. As Asia File also produces these raw materials, the enlarged group could potentially save up to Euro 2 million (RM9.6 million) annually just by supplying in-house to PTG. This could lead to better pricing discounts and rising operational utilisation rates for the whole group.

Risks

Despite the apparent benefits of PTG, CIMB Research also cautions that given the larger presence of the group sales from overseas, short-term volatility in the foreign exchange rate (forex), especially that of the US dollar, could affect Asia File’s profit margin in the immediate term, as there is a lag period of around two to three months before the group would be able to pass on any cost increases to its customers. To minimise this impact, Asia File has plans to hedge its forex exposure.

There is also the risk that a price war could start between PTG and its rivals in Europe, although it’s not likely Asia File would want to resort to such an action although its competitors’ actions are less predictable. A global slowdown in the US and Europe could also, needless to say, affect the group’s sales going forward since its markets are now predominantly in those markets and users are likely to cut back on office and stationery supplies in any business slowdown.

What could Asia File be worth?

CIMB Research is bullish on the group’s acquisition of PTG and believes that Asia File is undervalued despite its share price having almost doubled to around RM9.75 at the time of writing in the last several months from its four-year trading range of RM4.00-RM6.00 (see Chart 2). In fact, the research unit has an end-FY08 price target of RM15.60 for the stock, basing it on still a reasonable CY09 target PE multiple of 13.0x for regional stationery stocks. The main catalyst would probably be the estimated strong 40% growth in the group’s CAGR by the research unit.

Notwithstanding the risks inherent in owning a stock whose share price has risen so rapidly, retail investors, meanwhile, could also likely be attracted to the company’s upcoming proposed 3:5 bonus issue, which should see more liquidity in its trading on the local bourse. With its growth likely muted domestically, Europe seems to be a good place for the group to make its comeback to the limelight, that is as long as it sticks to doing what it knows best in the stationery business.

By: James from: FindArticles - Hot European Foray
Malaysian Business, Jan 1, 2008, by James S