Prolexus Bhd
(July 3, RM1.40)
Downgrade to hold with a lower fair value of RM1.36: We believe Prolexus Bhd should be trading at a discount to its direct competitor, Magni-Tech Industries Bhd (one-year forward price-earnings ratio of 10 times).
We regard Prolexus as a marginal garment producer relative to Magni-Tech. The seeming shortfall in terms of execution and competitiveness could undermine its impending capacity expansion.
Prolexus reported a third quarter ended April 30, 2017 (3QFY17) net profit of RM1.6 million (quarter-on-quarter: -79%; year-on-year [y-o-y]: -54%), bringing nine months of FY17 (9MFY17) net profit to RM15.7 million (y-o-y: -14%). Earnings came in below our earnings estimate at 50%. 9M earnings typically contribute 60% to 65% of full-year earnings.
No dividend was declared for the quarter as expected.
The earnings shortfall was due to softer-than-expected top-line growth as sales in the quarter declined 15.4% y-o-y. This stemmed from both its apparel segments as the advertising segment saw marginal growth. The top-line weakness came in spite of healthy top-line growth by its primary client, Nike.
The gross margin declined to 18.9% (versus 19.2% in 9MFY16). This was due to lower economies of scale and the higher minimum wage taking effect.
Prolexus is expected to complete its double plant expansion in the financial year ending July 31, 2018 (FY18). Specifically, its Vietnam plant and Kluang, Johor fabric mill will commence operations in 1QFY18 and 2QFY18 respectively. However, for the interim, we expect initial start-up costs and underutilisation of capacity to initially weigh on margins.
We take this opportunity to further cut our margin and growth assumptions to better reflect Prolexus’ prospects. Factoring in changes to our assumptions, we cut our FY17/FY18 earnings by 15%/3%.
Key risks to our forecasts include delays in its Vietnamese and Kluang expansions, further top-line slowdown and higher-than-expected start-up costs. — AmInvestment Bank, July 3
