I will keep this article precise and engaging because too much information can be, at times, inconvenient to readers especially for the beginners. I consider myself a beginner too.
Question 1: Who is Prolexus and what they have been doing?
Apparel Division
Apparel division is the main revenue driver contributing 95.2% of revenue and 206.2% of profit after tax (“PAT”) for the group in FY2019. The division manufactures sportswear apparels for major global brands.
Advertising Division
The advertising segment contributed 4.0% of the total Group revenue and 61.3% of total Group PAT in FY2019. The advertising division is involved in managing, operating, sales and marketing of media airtime for Digital Out-Of-Home TV network with 15 PowerScreens located across Malaysia. All of the digital outdoor screens are placed at strategic locations with high traffic rates.
Textile Division (Newly added in late 2018)
The textile mill located on a piece of freehold land measuring 144,201 square meters in the district of Kluang, Johor. It recently commenced operations in November 2018. The textile mill is part of the Group’s vertical integration strategy of the apparel manufacturing value chain with the expansion into upstream fabric production to complement the existing core business of apparel manufacturing by internal procurement of knitted fabrics as well as for external fabric sales.
Question 2: That’s all sound just fine. Why should I continue reading about this company when I can look at healthcare companies who will benefit the most during this pandemic?
PROLEXUS has launched its revolutionary anti-virus protective mask ProXmask90V that can provide optimal protection against Covid-19. Designed and engineered with its ProX technology, the ProXmask90V is marketed as being able to inactivate 99.9% of SARS-CoV-2 that causes Covid-19, other coronaviruses as well as influenza viruses and bacteria.
For more information, click the following link: https://www.thestar.com.my/metro/metro-news/2020/06/30/best-protection-against-covid-19
Question 3: Look, during this pandemic, a lot of companies suddenly came out with so many "interesting announcements" ranging from producing face mask to even producing gloves. SHOW THE EARNINGS.
Note this phrase: Profit before tax in the current quarter increased to RM27.8 million compared to the corresponding quarter of the preceding financial year. This is mainly contributed by the higher profit margin from the sales of fabric mask.
Question 4: How about the financial performance of the company in the past few years?
Question 5: What happened in 2018 and 2019?
2018
The Group registered a total revenue of RM302.7 million for financial year ended 31 July 2018 (“FY2018”) which represents a 13.1% decline over the previous year. The decline in revenue is mainly due to the following: (a) Reduced orders from major customers in the apparel division (b) Weakening of the US Dollar as the Group’s revenue are predominantly in US Dollar. Revenue from the advertising division, however showed a positive growth of 12.7% for FY2018.
The Group registered a profit before tax (“PBT”) of RM13.6 million for FY2018 declining by 62.7% compared to financial year ended 31 July 2017 (“FY2017”). This was mainly due to the unfavorable foreign exchange movements, a decline in sales orders, escalating compliance costs and start-up costs incurred for the textile mill during the year.
2019
The Group registered a total revenue of RM364.0 million for financial year ended 31 July 2019 (“FY2019”) which represents a 20.3% growth compared to the previous year. The increase in revenue is mainly derived from strong growth in sales orders from the apparel division of 20.1% compared to the previous financial year. Advertising division also recorded a strong revenue growth of 14.7% in FY2019.
The Group registered a profit before tax (“PBT”) of RM12.3 million for FY2019 declining by 9.1% compared to financial year ended 31 July 2018 (“FY2018”). Despite the revenue growth, PBT declined in FY2019 mainly due to the following: (a) Increase in depreciation charges mainly due significant additions to property, plant and equipment (“PPE”) for the new textile millb. (b)Increase in finance costs mainly from additional borrowings secured by the Group to finance the asset acquisitions for the new textile millc. (c) Increase in recruitment costs in the apparel division for FY2019
Question 6: Final question, what’s the target price?
In the latest QR, the EPS stands at 13.67 cents vs 4.15 cents in 2019. As the pandemic will remain for the next 1 year, annualising the EPS would give us 54.68 cents. This is extremely high, and one should not simply apply this to PE of 10x. Think very logically, this earning would be sustainable for the next 10 years so don’t simply abuse PE ratio. (I have read some of the articles published by good investors but got disappointed because they, too, abuse the PE valuation).
The current annualised EPS is about 54.68 (which wouldn’t be sustainable in long term). Historic EPS ranges from 13-19 cents. By
taking a conservative annualised EPS of 20 cents and applying this to
PE of 10x – 15x, the target price should be RM2 – RM3. The company has a strong cash balance of close to RM104 million.
Question 7: Sorry, forget to ask about the target price for warrant.
Warrant price is derived from underlying instrument and that’s why warrant is a type of derivative. The exercise value is RM1.2 and exercise ratio is 1. If the mother share’s target price ranges from RM2-RM3, then the warrant’s target price ranges from RM0.80-RM1.80.
Bonus Question: How other companies have performed when they announced their intentions to venture into production of face mask? (These companies don't even have solid earnings!)
Disclaimer
None of my posts was meant to influence your investment decision. I decided to share my analysis of stocks so that I could benefit from your constructive feedback. As I have mentioned earlier, I am here to share my knowledge and also to learn from many of you. In specific to this post, I am not a substantial shareholder of Prolexus Berhad.
Thank you, and please leave your constructive feedback.
Kaviyarasu
https://klse.i3investor.com/blogs/kaviyarasu/2020-10-04-story-h1514445535-PROLEXUS_THE_UNPOLISHED_DIAMOND_DURING_COVID_19_TP_by_Mr_OTB_RM2_73.jsp
