The acquisition of FMU5 is transformative for Priceworth, as it would lead to a multi-fold increase in earnings. Substantial dilution to its share base is necessary to fund the acquisition but we believe it would be more than offset by higher projected earnings. Our ex-all FV is MYR0.13 based on FY18F P/E of 8x. However, as it has yet to complete its rights and bonus issues, we believe it should be valued on pre-rights and bonus basis, with implied FV of MYR0.42. Priceworth is NOT RATED.
FMU5 – a transformative acquisition. Priceworth International (Priceworth) announced the acquisition of FMU5 for MYR260m in Oct 2016. Although its share base would be diluted by 5.7x in order to fund the acquisition, we believe FMU5 would be a game-changer for the group as it would provide a sustainable source of raw materials for its previously under-utilised plywood equipment. On a sustainable basis, FMU5 could generate >MYR100m pa in net profit vs the group’s current breakeven position of MYR1-2m pa.
Multi-fold increase in earnings expected. We expect Priceworth to report a net profit of MYR60m and MYR107m in FY18F and FY19F respectively (EPS of 1.6-3sen respectively on an ex-all basis). In our forecasts, we have conservatively assumed full ramp-up of timber harvesting works starting November, compared to management’s guided timeline for optimal operations by mid-Sep. We have also assumed that Priceworth would retain a 75% stake in FMU5 post-IPO of the latter on SGX, with an indicative valuation of c.MYR700m. Both our forecasted group earnings and targeted valuation for FMU5 compare favourably with the group’s current market cap of c.MYR170m.
Corporate exercises. At present, it has completed the private placement and special issue, which have collectively raised c.MYR28m cash for the group. It is now in the midst of undertaking the 2-for-1 two-call rights issue, which comes with a bonus share for two rights subscribed – to raise c.MYR92m for the group. Our ex-all fair value for the stock is MYR0.13/share, but pending the completion of the rights issue, we think the stock should be valued on a cum basis. Our indicative valuation for the stock is MYR0.42, pre-rights and bonus issues.
Significant margin of safety against execution risk. We believe the substantial implied upside to its current share price, coupled with our conservative earnings estimate (assuming a 5-month delay to our original timeline assumption) offer a significant margin of safety for investors. However, investors buying into the stock now may need to subscribe to the rights (vs disposing the rights in the open market) in order to enjoy the maximum upside, as the rights may not be fairly priced in the market when it is up for trading – this is due to the significant supply of incoming rights.
Key risks. A key risk to highlight is that at the time of writing, the supplemental agreement for FMU5 has not yet been signed. Management has guided for the agreement to be finalised by early May, and for harvesting works to begin by mid-May. Another risk is in execution, as the group has no proven track record in managing a large timber concessionaire.
Stock: [MAXLAND]: MAXLAND BERHAD
2017-04-25 10:27 | Report Abuse
RHB's Not Rated Note on PWORTH
Priceworth International
Priceworthy Indeed
The acquisition of FMU5 is transformative for Priceworth, as it would lead to a multi-fold increase in earnings. Substantial dilution to its share base is necessary to fund the acquisition but we believe it would be more than offset by higher projected earnings. Our ex-all FV is MYR0.13 based on FY18F P/E of 8x. However, as it has yet to complete its rights and bonus issues, we believe it should be valued on pre-rights and bonus basis, with implied FV of MYR0.42. Priceworth is NOT RATED.
FMU5 – a transformative acquisition. Priceworth International (Priceworth) announced the acquisition of FMU5 for MYR260m in Oct 2016. Although its share base would be diluted by 5.7x in order to fund the acquisition, we believe FMU5 would be a game-changer for the group as it would provide a sustainable source of raw materials for its previously under-utilised plywood equipment. On a sustainable basis, FMU5 could generate >MYR100m pa in net profit vs the group’s current breakeven position of MYR1-2m pa.
Multi-fold increase in earnings expected. We expect Priceworth to report a net profit of MYR60m and MYR107m in FY18F and FY19F respectively (EPS of 1.6-3sen respectively on an ex-all basis). In our forecasts, we have conservatively assumed full ramp-up of timber harvesting works starting November, compared to management’s guided timeline for optimal operations by mid-Sep. We have also assumed that Priceworth would retain a 75% stake in FMU5 post-IPO of the latter on SGX, with an indicative valuation of c.MYR700m. Both our forecasted group earnings and targeted valuation for FMU5 compare favourably with the group’s current market cap of c.MYR170m.
Corporate exercises. At present, it has completed the private placement and special issue, which have collectively raised c.MYR28m cash for the group. It is now in the midst of undertaking the 2-for-1 two-call rights issue, which comes with a bonus share for two rights subscribed – to raise c.MYR92m for the group. Our ex-all fair value for the stock is MYR0.13/share, but pending the completion of the rights issue, we think the stock should be valued on a cum basis. Our indicative valuation for the stock is MYR0.42, pre-rights and bonus issues.
Significant margin of safety against execution risk. We believe the substantial implied upside to its current share price, coupled with our conservative earnings estimate (assuming a 5-month delay to our original timeline assumption) offer a significant margin of safety for investors. However, investors buying into the stock now may need to subscribe to the rights (vs disposing the rights in the open market) in order to enjoy the maximum upside, as the rights may not be fairly priced in the market when it is up for trading – this is due to the significant supply of incoming rights.
Key risks. A key risk to highlight is that at the time of writing, the supplemental agreement for FMU5 has not yet been signed. Management has guided for the agreement to be finalised by early May, and for harvesting works to begin by mid-May. Another risk is in execution, as the group has no proven track record in managing a large timber concessionaire.