Sunday, December 20, 2009

Stock commentary: Pelikan

(Business Times) PELIKAN International Corp Bhd (5231), a stationery maker, says group revenue this year will be slightly lower than the RM1.28 billion made a year ago but will more than double in 2010.

This will be buoyed by the gradual recovery of the global economy and inclusion of results from newly-acquired Germany’s Herlitz AG.

“Herlitz is bigger than us with revenue of some RM1.6 billion. In 2010, the combined group revenue should be about RM3 billion,” Pelikan president and chief executive officer Loo Hooi Keat said.

Demand for Pelikan products was affected by the economic downturn this year, he added.
Pelikan should bounce back next year with a 10-15 per cent growth, Loo said after Pelikan’s extraordinary general meeting (EGM) in Subang Jaya, Selangor, yesterday. By 2013, the Pelikan group with Herlitz were targeted at raking in a RM5 billion revenue, he added.

Pelikan, a 117-year-old German stationary brand company, received shareholders’ nod for the purchase of a 66 per cent stake in Herlitz at the EGM.
The acquisition was made together with the Falkensee Logistics Centre and other related assets for about RM227 million or ?45 million cash.

This stock has fallen 76% after peaked out at $ 5.8. The stock sold as high as 40 times forward PE and now close to about 14 times. Still has a lot of earning growth expectations. Is it safe to jump in? OSK upgraded the stock price target to $ 2.57 while CIMB has a target of $ 1.58? Why such a big difference?

The last five years top line growth has been impressive but quality of earning is quite poor.

Any sharp eyes will spot the earning deterioration in 2008. Analysts like to blame it to soft economy and etc but the real culprit is higher material cost that eating into its margin. Material used/revenue ratio in 2008 was 43% vs 33% in 2007. Very little efforts to recover margin - a sign of a great brand but poor pricing power.

The sexy story being sold to public now is merger will double its revenue. OSK believes the merger will boost their net profit by $ 123 mln. If you look into Herlitz, the company has been struggling. Even I'm trying to be kind to just look at the EBITDA level but that's hardly impressive, 1 to 2% plus. No wonder sold for 50% of its net assets. I think you can do the math, OSK is definitely heading for disaster.

They bought out Advent International's 66% stake. Advent is a global private equity company. If Advent International has 140 investment professionals and raised cumulative of US $ 24 billion, why Advent did not manage to turnaround this company? What Pelikan can do differently to reap its "synergy"? (I think CIMB is quite sharp to raise this point). Pelikan has initiated plants relocation/consolidation to Eastern Europe to take advantage of lower production costs, setting up International Procurement Centre and Suppy Chain Management(which is nothing new to a lot efficient players). Buying revenue is not a smart way go. I certainly could not see very clearly of their strategic reasons.

If OSK take whatever numbers given by the company management without much critical thinking. I think CIMB's analyst is clearly out-thinking OSK's.

When you have merger of almost same size, integration is big headache. Countless studies found that almost 80% acquisition failed due to integration issues. Just pick up any business book if you are not convinced. So I'm going to skip the common issues especially this post if already longer than usual.

Looking what the CEO said, this company is clearly interested to drive its top line but not paying much attention to earning quality. They want to achieve RM 5 Billion revenue in 5 year time? More acquisitions? Or Sales, Sales, Sales?

Assuming Pelikan has great leadership to turnaround Herlitz, I don't think the benefits can flow through in less than 1 year. Hello 2010 is just 12 days away. This certainly reflects OSK's analyst has zero experience in running a real business.

The verdict, CIMB assessment is more accurate.

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