Inter-Pacific downgrades Perstima to ‘Neutral’ on higher capex spend

We still favour Perstima for its high dividend payouts and being a proxy to the consumer sector, says research firm

by NUR HANANI AZMAN/ pic credit:

INTER-Pacific Research Sdn Bhd has downgraded Perusahaan Sadur Timah Malaysia (Perstima) Bhd to ‘Neutral’ as the group’s expansion plans will require higher capital spending.

It also lowered its target price on the counter to RM4.49 versus RM4.78 previously. “We still favour Perstima for its high dividend payouts and being a proxy to the consumer sector, particularly to canned food product manufacturers that make up most of its clientele.

“Risks to our call include intensifying competition, volatile raw material prices and volatile exchange rates,” the research house said in a report yesterday.

Perstima on Monday announced its plan to undertake a one-for-five rights issue to raise up to RM59.58 million, partly to finance an electrolytic tinning and tin-free steel production line for the group’s manufacturing plant in the Philippines, as well as raw materials purchase.

As an incentive for shareholders to subscribe to the rights issue, Perstima has also attached a one-for-two bonus issue to the rights issue.

Inter-Pacific Research is neutral on the exercise for its slight dilutive effect on the company’s share price.

It views the boost to the stock’s liquidity positively as the exercise will increase the total number of floating shares.

“Historically, Perstima has seen volume trading at very thin levels. Revenue growth may continue to be depressed by cheaper imports of tinplate, as seen by the dip in sales in the third quarter ended Dec 31, 2019 (3Q20),” it said.

Perstima lacks any growth catalyst in the near term, the research house said. The group will only start to see notable earnings growth in the financial year ending March 31, 2021 (FY21), from contributions of its Philippine plant operations that will commence around June 2021.

“We maintain our sales forecast and tweak our capital expenditure estimates,” the research firm added.

In its March 2 filing to Bursa Malaysia, Perstima said the rights issue will allow it to raise funds without incurring additional interest cost.

The rights issue also provides an opportunity for existing shareholders to increase their equity participation in the group and benefit from the growth of its current and future investments.

Upon completion of both issues, Perstima’s enlarged share capital will rise to 129.1 million shares, worth RM158.89 million.

The proposals are expected to be completed in the second half of 2020.

On Nov 22, 2018, the group incorporated a new, wholly owned subsidiary in the Philippines, namely Perstima (Philippines) Inc for the expansion of its manufacturing and supply of tinplate and tin-free steel business to the country.

The new plant will have a manufacturing capacity of approximately 200,000 tonnes per annum, bringing the group’s total capacity production to 520,000 tonnes each year.

Total estimated investment cost for the new plant stands at approximately US$65.9 million (RM278.76 million) and will be partially funded by Perstima’s internally generated funds and bank borrowings.

The group’s net profit fell 37.5% to RM6.33 million in 3Q20 compared to RM10.13 million reported in the same quarter the previous year, due to lower sales volume despite higher profit margin during the period.

Revenue for the quarter declined 14.3% to RM203.59 million from RM237.48 million previously.

Its subsidiary in Vietnam reported a profit before tax of RM2.5 million, down from RM4.8 million previously, while the Philippine operations have yet to register any revenue as the business is still at a preliminary stage.

Going forward, the company expects its growth and profitability to be affected by the continued combination of a higher presence of imports and the uncertainty and volatility of the ringgit against the US dollar.

Shares of Perstima closed seven sen or 1.8% higher at RM4.02 yesterday, valuing the group at RM399.2 million.