One major investing point which many investors miss out on when considering local stocks is their market audience. That is also one of the sore points among international investors when it comes to looking at emerging market stocks. Pick any local stock, you have first look at their market size, most are just a proxy on the Malaysian market industry. That being the case, their growth would be limited to the size and organic growth of the local industry. At least if you are in exports, your growth can be said to be better than organic. You then pick out stocks with products and services that is not limited by that factor, the brand must travel, not many Malaysian brands travel well, like a good wine on a long haul flight. Pelikan is one of the good strategic story, and brought back by a visionary and gung-ho Malaysian, Loo Hooi Keat.
The principal activities of the Company and its subsidiaries include manufacturing and distribution of writing instruments, art, painting and hobby products, school and office stationery, printer consumables and investment holding. As at 8th April 2005 the Company is involved in the manufacturing & distribution of an international brand of quality writing instruments, stationery & office supplies after disposed the entire logistics business.Pelikan’s recent 4Q08 results was a big disappointment. While the RM43.4m net loss for the quarter was a worry, the bigger concern is the 29% yoy topline compression, which is a sign of just how bad the recession in Europe is, particularly in Germany. Germany is Pelikan’s largest market, contributing 45% of group sales in 2008. The next two markets are Switzerland and Italy. These three countries alone contribute more than 60% of the group’s revenue.More than 80% of Pelikan’s revenue comes from Europe. From the 2007 peak, share price is down 90% and it looks like market is pricing Pelikan to go bankrupt! That is close to being preposterous. Net gearing as at end-08 is 0.5x and with no major capex plans this year, net gearing should fall to 0.3x. Valuation is at distressed levels, at only 0.4x PBV.
Switzerland saw a 29% drop in revenue in 2008 but Latin America did very well with a 22% rise in revenue. Its operating profit growth was even more impressive at 47%. Pelikan is already feeling it in its hardcopy division, which contributes around 40% of group revenue. The company produces printer consumables such as laser toners and inkjet cartridges, which are compatible with the products original brand manufacturers (OBM) such as HP and Canon. Pelikan’s hardcopy products are usually 30-40% cheaper than the OBMs. However, the OBMs are now slashing prices to capture market share. This could put further pressure on Pelikan’s profit margin.
At current levels, Pelikan is a very very attractive target to be taken over by private equity firms. Just 0.4x-0.5x book value is pretty ridiculous. At its current market capitalisation of only US$55m and still pays dividend (FY07 12.4 sen, FY08 2 sen), Pelikan is an attractive takeover target for regional stationery companies looking for an established stationery global brand. If taken over, a genuine bid should be at least 0.7x-0.8x book value, considering that the company's prospects and valuations are taken during a depressed recessionary period.
I would look closely at stocks that can give me 30%-50% return over the next 6 months, or else its not worth the risk. Pelikan to me is lucrative enough at current levels (below RM1.00) to have that kind of upside, with or without being bought over.
p/s photo: Katrina Kaif