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Monday, July 27, 2015

Prolexus Berhad - Winning Prospects

· Riding on athletic apparel boom. PRLEXUS has shown strong revenue and earnings growth with 5-year CAGR of 17% and 36%, respectively. We think this is due to the rising demand for premium athletic apparel, which has propelled Nike Inc and Under Armour’s apparel segment revenues up by 8% and 30% respectively in 2014. Also, since its revenue is based on international demand, PRLEXUS is unlikely to be affected by the slowing local consumer demand. Looking ahead, we expect PRLEXUS to maintain strong revenue growth of 11-18% in FY15-16E on rising fitness awareness and burgeoning demand in developing countries due to rising income levels.

· Strong dollar to accelerate growth thanks to export focus. Exports make up 97% of PRLEXUS revenue, with 63% of revenue coming from the US. Hence, we expect a stronger USD to positively impact revenue due to higher unit selling price. Furthermore, we think NP margins could rise as well, because raw material costs (approx. 55% of cost) are denominated in USD, while the remaining fixed costs and labor costs are denominated in RM or RMB, implying that a strengthening USD is net positive for the group. We estimate that every 5% appreciation in the USD-MYR will increase FY15-16E bottomline by 8%-10%.

· Solid margins on advertising business. We gather that PRLEXUS also owns and leases approximately 15 LED billboards in major Malaysian cities. Target growth areas include East Malaysia and the Klang Valley. Given the low setup and operating costs of the billboards, we expect sustainable advertising margins of 25%, in line with its 3-year historical margin of 24- 27%. We are positive in the longer run on PRLEXUS's advertising business which has a unique selling point of having airtime in major cities around Malaysia. However, the contribution to the group is small currently.

· Expanding China and Malaysia facilities PRLEXUS operates manufacturing plants in Malaysia and China, employing approximately 850 and 500 workers respectively. Management mentioned that through FY15- 17, they target to add 500-600 workers in Malaysia by expanding its night shift operations, while they intend to add about 600 workers in China after their plant expansion which is slated for completion in late 3QCY15. We impute FY15-16 work-force growth at a very conservative 150-400 pax, which we estimate could lead to production increase of 6-12% to 14-16m garments per year. We also expect long-term net margins to expand beyond the current 6% from FY17 onwards, as worker efficiency improves and production ramps up.

· In a net cash position of 31.4 sen/share as of FY14. After including FY15- 16E CAPEX of RM23m-RM5m for PRLEXUS's plant expansion plans, we believe the company will still maintain its net cash position with cash/share of 24.0-43.6 sen per share. Hence, we think PRLEXUS should easily maintain its 15% dividend payout ratio, implying FY15-16E dividends of 4.1- 4.7 sen/share (1.6-1.8% yield).

· Trading Buy with Fair Value of RM3.15. Our Fair Value of RM3.15 is based on 10x Fwd PER applied to FY16E EPS of 31.5 sen. Our applied PER is in line with FBMSC’s Fwd. PER of 10x. We think our valuation basis is suitable due to PRLEXUS’s superior Fwd. ROE of 17% against the FBMSC’s 9%, despite lower FY15-16E earnings growth at 11-15% against FBMSC’s 16-19%. Note that PRLEXUS’s current Fwd. PER of 10x implies a 9% discount to its peer average (11x), 30% discount to its own 3-year historical average (14x) and a 65% discount to NIKE’s Fwd. PER of 29x. We think this indicates that valuations are comparatively undemanding, as NIKE contributes >70% of PRLEXUS’s revenue. Our Fair Value implies a total return of 21.4% (19.8% upside, 1.6% dividend yield).

Source: Kenanga Research - 27 Jul 2015

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