Malacca Securities has done a coverage on Central Global Berhad (CGB) but not assigned any rating on this counter. However, the securities firm has set its target price for this counter at RM1.29, which translates to a capital upside of 41.8%.
Some of the key-takeways on CGB are:
• CGB will be leveraging on the rising demand for adhesive tapes as the group is already operating a maximum capacity and looks to ramp up their production by 3.5x to 70.0m sqm of tapes p.a.
• Turnaround in FY22f is largely on the cards, backed by the construction segment’s outstanding orderbook of RM410.1m, while FY23f will gain further strength from their on-going manufacturing segment expansion plans.
• CGB could justify by pegging its FY23f EPS of 14.3 sen to P/E of 9.0x, arriving at a fair value of RM1.29.
Key highlights on CGB:
Market leader in industrial tapes and label stocks. With 50 years of operational experience, CGB evolved into a one-stop solution provider for crepe paper masking. Based on FY21 revenue of RM60.1m from the manufacturing segment, CGB
commands approximately 60.0% market share of the masking tape business in Malaysia. Their products are also sold to international markets mainly in the East Asia & South East Asia regions.
Ramping up production capacity. CGB will be undertaking an expansion of their current operations by relocating their operations from Perai to Sungai Petani, Kedah. The addition of new machineries would bump their production capacity to 70.0m sqm of tapes p.a. (from 20.0m sqm of tapes p.a.).
Backed by sturdy orderbook. To-date, CGB is supported by more than a handful of local construction contracts with combined outstanding value of RM410.1m. This represents a healthy orderbook-to-cover ratio of 8.7x against FY21 construction revenue of RM46.9m will provide strong earnings visibility over the next 3 years.
Outlook. Ramping up production capacity by relocating their operations from Perai to Sungai Petani, Kedah. The addition of new machineries would bump their production capacity to 70.0m sqm of tapes p.a. (from 20.0m sqm of tapes p.a.). On top of that, its expansion plan to Southeast Asia markets. The move is to cater for the rising demand from existing customers and will also allow the group to expand their product offerings to new customer base within the South East Asia markets. Since July 2022, the installation of additional mixers will improve the mixing output by 20.1% to 215MT/m (from 179MT/m).
Actively building the construction segment. Apart from ramping up their manufacturing production, CGB will also build their new revenue base within the construction segment. Moving forward, the outstanding orderbook of approximately RM410.1m, representing an orderbook-to-cover ratio of 8.7x FY21 construction revenue of RM46.9m will provide earnings visibility over the next 3 years.
Their 70.0%-owned subsidiary, RYRT International Sdn Bhd has recently secured a RM183.3m contract for the construction of Projek Jalan Semawang Ke Tanjung Kuala Gum-Gum, Sandakan, Sabah that will run from 14th October 2022 to 13th October 2025. Meanwhile, we gather that their tenderbook is relatively healthy at RM500.0-600.0m, mainly for infrastructure- related projects in East Malaysia. Malacca Securities has imputed an orderbook replenishment assumption of RM150.0m for FY23f.
Eyeing for other opportunities. Apart from the two existing businesses, CGB will be eyeing for further diversification into the renewable energy segment, specifically into the solar energy. With their foothold in the construction segment, CGB will be eyeing on the construction of solar PV projects.
Potential dilution. Following the completion of bonus 1-for-2 warrants issue on 29th July 2022, CGB will be undertaking a private placement exercise that revolves around the issuance of up to 39.2m new shares (not more than 30% of enlarged
total number of shares issued) to raise between RM29.3-33.0m in order to fund existing and future construction projects.
Financials. Over the past 3 financial years (FY19-21), CGB recorded consecutive net losses within the range of RM0.5m to RM4.5m as revenue remained flattish over the years. Facing the stiff pricing competition after Chinese manufacturers lowered prices for masking tapes and label stocks to support manufacturing output from the trade tension between US and China, CGB has decided to seek new revenue stream with the group having ventured into the construction industry.
Moving into FY22f, their successful venture into the construction industry appears to have bear fruit with the group return to profitability in both 1QFY22 and 2QFY22. For FY22f, it is expected both top and bottomline to deliver improvement, with the
former rising 85.7% YoY to RM198.8m, backed by the uninterrupted execution of construction orderbook in hand as construction operations in FY21 was impacted by multiple lockdowns. Likewise, the bottomline is expected to turnaround,
recording RM10.7m in net profit.
The securities firm also expect sequential improvement for FY23f, backed by the delivery of outstanding construction orderbook on hand, coupled with their on-going manufacturing plant expansion plans. Revenue is expected to improve 38.4% YoY to RM275.1m, while net profit is expected to come in at RM17.9m (+67.8% YoY).
Valuations. At RM0.91, CGB is trading at undemanding valuations based on projected FY22f and FY23f PER of 10.7x and 6.4x, respectively. Malacca Securities assigned a P/E multiple of 9.0x (in line with peers that revolves around the manufacturing of adhesives and related businesses) to FY23f EPS of 13.4 sen, arriving to a fair value of RM1.29.
The group did not adopt any dividend policy. Hence, it is expected no dividends to be declared over the foreseeable future as CGB looks to preserve their earnings and focus onto their on-going manufacturing expansion plan.
Investment risks: Hiccup in manufacturing expansion, failure to secure anticipated projects, rising raw material costs.
