STOCK FOCUS OF THE DAY
Prolexus : An emerging OEM player with high growth
visibility BUY
We initiate coverage on Prolexus Bhd (Prolexus) with a BUY
rating and a fair value of RM1.84/share, pegged to FY17F fully diluted PE of
12x. We believe Prolexus deserves to trade at a premium due to its superior
margins and potentially higher profit growth underpinned by its expansion plans
in Vietnam. Prolexus is an emerging OEM sportswear player in Malaysia. The
group’s core business is in the manufacturing and sale of sportswear. Prolexus
has factories in Penang and Johor in Malaysia, and in China. We are positive on
Prolexus' expansion plans in Vietnam as this will boost its production capacity
to meet the growing demand for premium athletic wear. We expect Prolexus to
continue benefitting from increased orders from key customers namely Nike,
Under Armour and Asics. We understand that more than 90% of the group’s total
sales are attributed to its key customers.
Margin enhancement is expected to come from the new knitted
fabrics, which allow fabrics to be produced in-house instead of being sourced
externally. Prolexus will be able to reduce its production costs and improve
its net margin. Knitted fabrics are one of the key materials in the apparel
production. A portion of the knitted fabrics produced by the new mill are
envisaged to be sold to external parties. This is expected to provide an
additional source of revenue for Prolexus in the future. We estimate Prolexus'
revenue to grow by 14% to RM457 mil in FY17F underpinned by strong orders from
key clients such as Nike and Under Armour. Prolexus' sales growth in FY18F is
also anticipated to be aided by external sales of knitted fabrics. We forecast
earnings to rise by 13% from RM32mil in FY17F to RM36mil in FY18F, and by 14%
to RM41mil in FY19F supported by higher topline growth. To be conservative, we
have assumed EBIT margins to be flat at 9.5% in FY17F and FY18F compared with
10% in FY16. We forecast Prolexus' gross DPS at 3.7 sen in FY17F, which implies
a yield of 2.3%. Prolexus' balance sheet is anticipated to remain healthy in
spite of the capacity expansion plan. .
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