PELIKAN looks set for a turnaround year, after spending 5 consecutive years in the red. Streamlining of businesses, product rationalisation and the cessation of its toner powder production are among the steps taken over the years to stem the bleeding. Beyond FY16, we project PELIKAN’s earnings to grow by 21.7%/15.8% in FY17/FY18, underpinned by: (i) higher margin product offerings, (ii) market share expansion within its core European markets, and (iii) deeper foray into the Latin America and Asian regions. Despite the potential turnaround in earnings, we still lower our call from "Trading Buy" to "Non Rated" as the current market price is traded within our valuation range of RM0.88-RM1.00 based on 11.4x FY17-FY18E EPS. Business rationalisation completed. PELIKAN has undergone a lengthy period of streamlining its European Assets and rationalising its business operations. Since our last report on PELIKAN (Trading Buy, dated 8 Oct 2014), the Group has completed the injection of its core stationery sales and distribution assets into its 70.9%-owned Germanlisted subsidiary, Herlitz (Currently known as Pelikan AG). This move has begun to bear fruit, with the Group having streamlined all the key stationery organisations and assets worldwide to create a focused stationery organisation under the helm of Pelikan AG.

The turnaround year… For 9M16, revenue grew by to RM1,041.0m (+2.0%). Although sales from Switzerland (-27.0%) and Americas (- 7.5%) suffered contractions, overall Group revenue was driven by growth from Germany (+7.4%), Rest of Europe (+3.2%) and Rest of World (+20.5%) which collectively account for 79.2% of the top-line. Of note, the positive economic data for the German and European markets had improved consumer sentiment as reflected in the improving sales during the “back to school” season in the previous quarter. Meanwhile, lower operating expenses (-1.0%) and taxation (-61.2%) also contributed to the return to profitability with net profit registering RM28.3m for 9M16 (vs 9M15 net loss: RM45.1m).

Eyeing Growth! Now with a leaner business, focus has now shifted to: (i) improving margins with better product offerings, (ii) increasing market shares within its core European markets, and (iii) growing revenue, brand awareness and product range within Latin America and Asian regions. We see some initiatives already being taken, which include the opening of its flagship retail store in the Gardens, Mid Valley City as well as tie-ups with distributors to expand their sales channels. At the same time, we understand the Group is addressing improvements in the remaining printer consumable business via the adaptation of distribution channels and product offering in addition to increasing utilisation rates for its production facilities via outsourcing services.

Dividends to resume after a 4-year hiatus? We see the potential for dividends to resume after a 4-year hiatus and have estimated dividends at 1.2-1.3 sen for FY17-18 based on a conservative pay-out ratio of 15%, implying a dividend yield of 1.3-1.4%. While we do not anticipate heavy CAPEX plans, we believe that the bulk of free cash-flow will be used for repaying bank borrowings given the high net gearing of 0.65x (as at 3Q16).

NOT RATED with a FV range of RM0.88-RM1.00. We project the Group to register FY16 net profit of RM34.6m before growing to RM42.1m-RM48.7m for FY17/FY18 (21.7%/15.8%). Despite the potential turnaround in earnings, we still lower our call from "Trading Buy" to "Non Rated" as the current market price is traded within our valuation range. PELIKAN’ should be valued within the range of RM0.88-RM1.00 based on 11.4x PER to FY17E-FY18E EPS, in-line with the FBM Small Cap index.

Source: Kenanga Research - 14 Feb 2017