CBRS: Muda Holdings - BUY - 12 Aug 2008

CBRS: Muda Holdings - Visit to appreciate (Company Update)



Price: RM0.775

Target Price: RM1.20

Recommendation: BUY



· We visited Muda's 55-acres paper mill and corrugated plant in Kajang and were impressed by the extensive infrastructure supporting the paper mill operation. Below are some key takeaways:

· The largest domestic industrial paper manufacturer with a combined annual paper production of 324,000MT from its Kalang and Tasek mills. Muda's main product range include medium and liners used in carton production, grey chip board used for book and file covers, and core board used in consumers and industrial rolled products. Apart from paper milling, Muda also operates 6 corrugated plants producing c.100,000MT corrugated cartons per annum. Other business includes trading of stationary products.

· Extremely high entry barrier for paper milling business. Start up capital for a paper mill is estimated at between RM500 m - RM 1billion based on the latest sale of Genting Sanyen Industrial Paper to Paperbox transacted at RM745m in 2007. Current start up cost for a new paper mill is even higher given rising building material and machinery costs.

· Wastepaper collection, an essential part of the value chain as wastepaper forms the largest cost component at 45% of production cost. Conversion rate is at 1.2MT of wastepaper to 1MT of paper. Muda's wholly owned subsidiary - Central Malaya Paper (CMP) is the most established wastepaper collector in the country with extensive networks in Penang, Perak, Selangor, Melaka and Johor. CMP collects various types of wastepaper including old corrugated carton, old newspaper and old white paper. Annual collection of c.400,000MT is more than sufficient to fulfil Muda's wastepaper needs with an excess of 3,000-5,000MT wastepaper for sale monthly.

· A mini Syabas, IPP and IWK - all in MUDA! Given the large amount of water need to be mixed with wastepaper in paper production, Muda treats water drawn from the nearby Sg. Langat in its own water treatment plant. The treatment process is the same as adopted in Syabas except for chlorination as it is not meant for human consumption. We also visited the 9.6MW gas-powered combined heat and power plant (CHP) which supplies both power and heat to the paper mill. The CHP is an efficient plant as heat generated in the power generation process is channelled back to the paper mill for steaming and drying of paper, unlike other IPPs where heat generated is unutilised and substantial cooling is necessary to reduce heat and temperature. Muda also has an effluent treatment plant which is showcased by the Department of Environment (DOE) as an exemplary plant with high effluent control criteria.