Pelikan - BUY - 21 Aug 2008

Pelikan International Corp - 1HFY08 results above expectations (Results Note)



Price: RM2.40

Target Price: RM4.00

Recommendation: BUY



· Pelikan International Corp's (PICB) 1HFY08 net profit of RM68.2m is above expectations, accounting for 63% and 61% of our forecast and consensus respectively. The strong performance in 2QFY08 was in keeping with the seasonal stationery rush prior to the start of the EU school term in September.

· Strong back-to-school sales and appreciation of the Euro resulted in 1HFY08 revenue increasing by 25%. The impact of a stronger Euro is significant as 83% of PICB's 1HFY08 revenue came from the EU. EBIT margin declined by 1% however, mainly due to the elevated cost of raw materials (comprising approximately 50% of total operating expenses), particularly plastics and resins (that makes up 10-20% of raw materials cost). Pretax margin also declined by 2% in-line with lower EBIT margin and further pressured by higher finance costs and lower share of associates (from the disposal of Konsortium Logistik stake).

· Higher input costs caused 2QFY08 pretax profit to grow by a more gradual 12% in spite of a 21% increase in revenue from higher seasonal stationery sales. In addition, higher effective tax rate (with prior year tax losses having been utilised) and minority interest (from improvement in earnings of subsidiaries in Latin America and Japan) resulted in 2QFY08 net profit increasing by a moderate 5%.

· No dividends declared in 1HFY08 compared with 5 sen per share in 1HFY07. PICB is conserving cash in anticipation of tougher 2HFY08. We believe that FY08's dividend payout may be lower than the 30-40% dividend payout policy previously paid by PICB.

· Revise FY08 and FY09 earnings estimates downwards by 8% for both years in anticipation of slowing demand (Lowering both FY08 and FY09 sales forecast by 1%), particularly in the EU and higher cost environment (Raising raw materials cost assumptions by 2% for both years) in 2HFY08.

· Maintain BUY with revised target price of RM4.00 based on previous 11.6x PER applied to new FY09 FD EPS of 33.9 sen. PICB is currently trading at undemanding FY08 and FY09 PERs of 8.1x and 7.1x respectively.