Seng Fong a ‘Buy’, poised for exponential earnings growth

Seng Fong Holdings Bhd, the largest natural rubber exporter in Malaysia’s rubber processing industry, has been tagged a ‘Buy’ with a 52-week target price of RM1.90 at Apex Securities Sdn Bhd.

In an initiation coverage released yesterday (July 10), it said it expected Seng Fong’s earnings to grow exponentially in subsequent years, driven by capacity and margin expansions.

The stock yesterday was up 12 sen or 10% to RM1.28, its highest ever being listed in July 2022.

For the first nine months through March 2024, Seng Fong posted a net profit of RM40.8 million, up 108% from the same period in FY23, on a turnover of RM807.4 million, which was 16% higher year-on-year.

In its report, Apex Securities badged Seng Fong as the nation’s largest natural rubber exporter — with about 18.0% market share of total Malaysia’s natural rubber exports — with a strong track record of capacity expansions.

Since their IPO debut in 2022, it said the group increased production capacity from 142,000MT/pa to the current 190,000 MT/pa.

The expansion exceeded the capacity expected during the IPO (166,000MT/pa) in view of the rising demand. To support growth, Seng Fong has added more manpower and introduced additional working shifts, extending production hours to 18 hours/day, it said.

Going forward, it said Seng Fong was installing the Smart Rubber Manufacturing Equipment systems.

When fully installed by 3Q2025, it expected the capacity to gradually increase following an initial buffer period after system introduction.

By 2030, it said the group anticipated reaching a capacity of 250,000MT/pa, marking a 31.6% rise from the current capacity.

“Demand for Seng Fong’s products remained robust, with a utilization rate exceeding 85.0% in recent years even after increasing production hours and securing new customers,” it said.

On its margin expansions, it noted that Seng Fong operated on a cost-plus model, allowing it to pass all production costs, including raw materials and freight costs onto customers to maintain stable margins.

Apex Securities said that Seng Fong stood to benefit significantly from developments in its two largest consumer markets, China and India.

China, a major global producer and consumer of tyres, was poised for healthy growth driven by economic recovery and advancements in electric vehicle (EV) technologies, it said.

On the dividend front, it noted that Seng Fong has maintained a dividend policy of distributing 50% of profit after tax (PAT) to shareholders, paid out on a quarterly basis.

Looking ahead, it said its dividend forecast indicated a yield of approximately 4.0-5.0% based on the current share price.

Established in 1989, Seng Fongprincipally engages in processing of cup lump into block rubber and sold directly to customers, majority of which are tyre manufacturers, and also sold to international rubber traders.

It is currently operating three factories all located in Gemas, Negeri Sembilan with a total production floor space of approximately 319k sqf and focused on production of Standard Malaysia Rubber (SMR) grades.

As an export-oriented group, the report noted that Seng Fong’s top five customers were primarily tyre manufacturers and rubber trading companies based in China, Hong Kong, Taiwan, and Singapore.

These included Wanli Group International (tyre manufacturer), General Science (tyre manufacturer), XHY Tyre (tyre manufacturer), R1 International (rubber trader), and Westwater Group (rubber trader). –TMR