Prolexus, an apparel manufacturer established since 1976 and listed on the Kuala Lumpur Stock Exchange since 1993, has today grown to be the forerunner in Malaysia’s apparel industries with a market capitalisation of around RM239 million. Over the past five years, we have seen it riding on a sustained bull run with its share price surging multi-fold from a low of RM0.12 in November 2011 to a high of RM2.29 in November 2015.

Nevertheless, the strong rally began to lose its momentum towards the end of 2015 and its share price has retreated to RM1.40 as of 22 December 2016, resulting in a lacklustre year-to-date performance of negative 34.3 percent. Hence, we take a closer look at Prolexus to explore if there could be value to be uncovered.

Business Segments

Prolexus’ business is mainly involved in the manufacturing of apparels and provision of apparel manufacturing services to its customers, with its apparels business segment accounting for 97.2 percent of its FY16 total revenue. The group currently has three manufacturing plants located in Malaysia and China, and they design and manufacture apparels which are exported to international markets comprising North America, European Union, Australia and Asia. Over the years, it has established itself as a reputable manufacturer of quality garment for international renowned brands. Moreover, the group also has retail businesses with its own brands under Be Elementz and Bixiz Kids.

Prolexus also has other business segments including advertising segment and others, which account for 2.4 percent and 0.3 percent of its FY16 total revenue respectively. Its advertising business segment provide advertising services on multimedia boards, while its others business segment involves investment holding, property investment, as well as provision of management services and provision of agency services.

Source: Company Annual Reports

Consistent Track Records

Looking back at its past five years of financial performance, Prolexus managed to achieve a consistent increase in revenue and profit year after year. Although it is not able to boast of a substantial multifold jump in its top or bottom line in any of those years, the steady climb is in itself a rather remarkable feat. On that account, Prolexus’ revenue doubled from RM189.5 million in FY12 to RM402.7 million in FY16, and its net profit tripled from RM10.8 million to RM33.2 million within that same period.

This leads to the group’s revenue and profit growing at a remarkable compounded annual growth rate (CAGR) of 20.7 percent and 32.3 percent respectively. Furthermore, Prolexus’ positive cash flow from operations year-after-year speaks along the same line presenting a steadily growing company with sustainable business operations.

We noted that Prolexus’ outstanding net profit margin of 8.3 percent could probably reflect its competitive advantage as compared to its peers Sinotop Holdings (Sinotop) and Teo Guan Lee Corporation (TGL) with net profit margin at 1.1 percent and 5.3 percent respectively. The competitive edges which Prolexus possess through lower cost of goods sold per unit and better operational efficiency will see to it benefiting significantly in the competitive apparel industry.

Source: Company Annual Reports

Potential For Growth

Having just completed the factory expansion of its China subsidiary in FY16, Prolexus already has plans to set up a new apparel factory in Vietnam. The lease of two parcels of industrial land which the group has secured in Long Jiang Industrial Park, Tien Giang Province in Vietnam, measured up to 61,950 square meters. The new factory would allow Prolexus to take advantage of the generally lower cost of production and larger pool of labour force in Vietnam, while at the same time reaping benefits from the free trade agreement between Vietnam and European Union which is expected to stimulate further growth in the export market.

Prolexus is also planning to set up a fabric mill on an 111,590 square meters freehold land located in the district of Kluang, Johor. This fabric mill enables the group to expand into upstream fabric production, so as to complement its existing core business by internal procurement of knitted fabrics instead of purchasing from external suppliers. The initial phase of both the Vietnam factory and Johor fabric mill are expected to be completed in the second half of year 2017.

Weakening Malaysian Ringgit

The Malaysian ringgit has been weakening since late 2014. When compared against the US dollar, it has depreciated approximately 38 percent from an exchange rate of around 3.2 in October 2014 to around 4.4 recently. Prolexus, being an exporter, remains a beneficiary of depreciating ringgit against other foreign currencies. From its FY16 annual report, 97.5 percent of Prolexus’s FY16 revenue is contributed from exports to foreign countries, out of which the exports to US alone accounted for 55.5 percent of its revenue, whereas revenue from Malaysia accounts for merely 2.5 percent. Therefore, should ringgit continue to weaken, Prolexus will be rewarded with increasing foreign export demands as well as gains from foreign currency translation.

Valuation

Based on Prolexus’s closing price of RM1.40 as of 22 December 2016, it is currently valued at a trailing twelve months price-to-earnings (TTM P/E) ratio of 7.7 times and a price-to-book (P/B) ratio of 1.2 times. The P/B ratio is comparable to the industry average of 1.3 times, but Prolexus’ P/E ratio seems attractive when compared against its peers Sinotop and TGL, which have TTM P/E ratio of 126.3 times and 19.9 times respectively.

Having said that, we would like to point out that Prolexus is subjected to some concentration risk in that its revenue received from four major customers collectively amounted to RM374.7 million, which is equivalent to an estimated 93 percent of its FY16 total revenue.  As such, Prolexus would likely suffer a significant impact to its revenue should any one of these major customers decided to cease its working relationship with Prolexus.

Source: Shares Investment, Bursa Malaysia; Updated as of 22 December 2016  

 

http://aspire.sharesinv.com/38088/prolexus-slow-and-steady-wins-the-race/