Century Bond's integrated and diversified packaging businesses are valued at only PER of 5-6x compared to the industry average PER of 15x after stripping out its net cash holdings of RM80m. Despite having a solid earnings record over the last 11 years, we think its existing businesses are significantly overlooked mainly because of low visibility on the company, and possibly its small shareholding spread. Be that as it may, it does warrant a look. Assuming a 20% discount to the industry average PER of 15x for its packaging business, our SOP-based valuations show that the company being worth at least RM2.19.

Background. Century Bond was founded in 1984 by Mr. Loi Tuan Ee and Mr. Tan Bon Leong. Listed in 2003, the company remains relatively low profile amongst the packaging companies despite it dominating more than 60% market share in Peninsular Malaysia's cement bag manufacturing market. Besides providing paper packaging and plastic packaging solutions, it is also involved in contract manufacturing, household care products, health products and instant beverage blending.

Strong balance sheet. Paper packaging generates the biggest sales contribution, accounting for more than 75% of the Group's revenue. Approximately 90% of its paper bags manufactured are cement bags. The second largest sales contributor is plastic packaging (12.3%) followed by contract manufacturing (10.4%). Century Bond has more than RM80m net cash, making up 50% of the company's current market capitalization. Despite experiencing lumpy earnings in the past, the company has remained profitable since its listing in 2003. Though packaging is a competitive industry, the company managed to achieve earnings CAGR of 5% over the last 11 years, which is admirable relative to its peers.

Establishing a bigger footprint in Indonesia. The Group has recently announced a 51:49 joint-venture with the second largest Indonesian cement producer, PT Bosowa to set up a cement bag manufacturing plant at Makassar, Sulawesi. The first production line with a capacity of 3m bags per month, which costs about RM3m-RM5m, will commence operation in June. In Malaysia, the company will also expand its capacity by 20% to cater to increased demand from local cement suppliers.

The cheapest packaging company. Given its i) strong balance sheet, ii) higher-than- average earnings margin (net margin is about 9% vs its peers' 3-4%), iii) more attractive dividend yield and iv) established track record, we think the company's existing businesses are significantly undervalued. Assuming a 20% discount to the industry average PER of 15x for its packaging business while also taking into account the net cash position of RM80m, the company's fair value should be worth of RM2.19, significantly higher than the current price level of RM1.38.

Source: PublicInvest Research - 15 Apr 2015