PP 7767/09/2010(025354)

7 May 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

V is it Note
7 May 2010
MARKET DATELINE

Muda Holdings Share Price

Fair Value
:
:
RM0.90
RM1.37
New Paper Mill Plant To Boost Capacity By 47.4% Recom : Not-rated

Table 1 : Investment Statistics (MUD; Code:3883) Bloomberg: MUD MK

Net Core Core EPS Core Net
FYE Turnover Profit EPS EPS # Growth # PER # P/NTA Gearing ROE NDY
Dec (RMm) (RMm) (sen) (sen) (%) (x) (x) (%) (%) (%)
2006 613.4 -23.0 -8.1 -2.6 ->100 n.a. 0.7 84.3 -1.9 2.2
2007 696.0 14.4 5.1 5.1 +>100 17.8 0.6 68.8 3.7 2.8
2008 782.3 45.5 15.8 15.8 +>100 5.7 0.6 61.0 10.6 2.8
2009 702.9 37.1 12.6 12.6 (20.2) 7.1 0.5 51.7 7.7 2.8
Main Market Listing /Trustee Stock/Syariah Approved Stock By The SC #Excluding EI

♦ We met up with Muda’s management recently. Key takeaways from the

Issued Capital (m shares) 298.1
meeting are: Market Cap(RMm) 268.3
Daily Trading Vol (m shs) 0.3
♦ New expansion plan for its Kajang mill. The company is embarking on
52wk Price Range (RM) 0.56-0.995
an expansion of its Kajang paper mill, which will increase capacity by Major Shareholders: (%)
140,000 tonnes, from 155,000 tonnes currently. Total capex for this new Hartaban Holdings 37.9
expansion is approximately RM180m, of which RM60m has been spent so Asia File Corporation 20.2

far. The management expects the new plant to be fully operational by

4QFY10. The company plans to finance the remaining capex via internally- FYE Dec FY10F FY11F FY12F
generated funds and borrowings. According to industry sources, Malaysia EPS chg (%) - - -
consumed 1.1m tonnes of medium and test liner paper in 2009, of which Var to Cons (%) n.a. n.a. n.a.
23% was imported from countries like Thailand, Indonesia and Taiwan. The
Share Price Chart
management believes that with the new expansion plan, the company
would be able to replace the imports by leveraging on its past track record,
expanded capacity, quality of its services and pricing of its products.

♦ Earnings CAGR of 35.5% (from 2005-2009). Over the last four years,
Muda has chalked up a commendable earnings CAGR of 35.5% (from
2005-2009) driven by continuous expansion in both its paper mills division
as well as paper packaging division.

♦ Earnings prospects. We expect FY12/10 earnings to increase by 50.7% Relative Performance To FBM KLCI

yoy on higher revenue as a result of: 1) higher selling prices; and 2)

improving demand for its products driven by the economic recovery.
Assuming Muda maintains its annual tax-exempt dividend of 2.5 sen p.a. FBM KLCI
(from 2007-2009), this represents a dividend payout ratio and net yield of
Muda Holdings
14.1% and 2.8% respectively.

♦ Risks to our view. 1) Sharp spike in raw material prices; and 2) Slower-
than-expected global economic activities, which could dampen the demand
for industrial paper products; and 3) Delays in expansions plans, which
could dampen future earnings growth.

♦ Investment case. Muda is currently trading at FY12/10 PER of 5.3x

compared to its 3-year average historical forward PER of 4.5x. By applying
a 25% discount to the FY10 regional peers’ average of 10.7x (see table 2),
we obtain a target PER of 8x. We have applied the discount to reflect Yap Huey Chiang
Muda’s smaller size, i.e. revenue and market capitalisation. Pegging a (603) 92802179
target FY10 PER of 8x suggests a fair value of RM1.37/share for Muda. yap.huey.chiang@rhb.com.my

Please read important disclosures at the end of this report.

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 7 May 2010

♦ Background. Muda Holdings Berhad (“Muda”) pioneered the paper milling and paper packaging industry in Malaysia
with its first paper mill in Tasek, Penang in 1964 and their first corrugator plant in Petaling Jaya in 1971. Today,
Muda has the largest integrated paper mill and corrugated plants in Malaysia with capacity of over 360,000 tonnes in
medium liner facility and 170,000 tonnes in carton packaging. The company is involved in an integrated operation
from waste paper collection (upstream) to the trading of paper, stationary and food packaging products
(downstream). Muda’s mills division sells 60% of its production to the packaging and converting division, while the
remaining 40% are sold to other packaging companies like Far East Packaging, Harta Packaging, Ornapaper
Industry, United Kotak and many more. As for its packaging division, the company supplies to various industries
including Electrical and Electronic (E&E), Food and Beverage (F&B) as well as Consumer and General Goods sectors.
Main customers include Nestle, Panasonic, Texas Instruments and Freescale Semiconductors.

♦ Paper mill division. In terms of capacity, Muda currently owns one of the largest paper mills in Malaysia. The
company offers a wide range of products to its domestic and overseas customers. These products include various
industrial grade paper comprising Test Liner, Corrugated Medium, Laminated Chip Board, Grey Chip Board, Yellow
Wrapping Paper, Inserting Paper, Manila Paper and MF Kraft. The company is currently operating from two paper
mills, which are located in Kajang, Selangor and Tasek, Penang with average capacity utilisation rate of over 90%.

o New expansion plan for its Kajang mill. The company is embarking on an expansion of its Kajang paper
mill, which will increase the capacity by 140,000 tonnes, from 155,000 tonnes currently. Total capex for this
expansion is approximately RM180m, of which RM60m has been spent so far. The management expects the
new plant to be fully operational by 4QFY10. The company plans to finance the remaining capex via internally-
generated funds and borrowings.

Photo 1 & 2: Samples of Muda’s paper mill products

Source: Company

Photo 3: Photo of Muda’s New Plant Photo 4: Photo of Muda’s CHP Plant

Source: Company

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 7 May 2010

o Industry outlook. According to industry sources, Malaysia consumed 1.1m tonnes of medium and test liner
paper in 2009, which 23% was imported from other countries like Thailand, Indonesia and Taiwan. The
management believes that with the new expansion plan, the company would be able to replace the imports by
fully leveraging on its past track record, expanded capacity, quality of its services and pricing of its products.
Furthermore, the management believes that the industry could have a steady growth of 3-5% p.a. for paper
consumption depending on the economic cycle.

♦ Paper packaging division. Besides the paper mill division, Muda is also involved in corrugating and converting
paper into paper packaging products. With two paper mills, Muda’s paper packaging division is assured of
uninterrupted supply of quality recycled industrial grade paper. And with this synergy, Muda is able to provide
quality value-added products at competitive prices, reliable packaging solutions and on-time delivery to its
customers consistently. The company produces different types of paper packaging products, which include: 1)
corrugated cartons and boards; 2) industrial paper bags; 3) laminated paper; and 4) paper pallet and honeycomb.
The company is currently operating from six strategically placed factories across Malaysia and one corrugated box
plant in Qingyuan, China with average capacity utilisation rate of 90%

Photos of Muda’s paper packaging products

Source: Company

Chart 2: Revenue and EBIT Margin Trend (from FY05-09)

RM m %
900.0 12.0
800.0
10.0
700.0
600.0 8.0
500.0
6.0
400.0
300.0 4.0
200.0
2.0
100.0
- -
2005 2006 2007 2008 2009

Revenue EB IT

Source: Company

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 7 May 2010

Chart 2: Product Mix For FY09

Ot her s
6%

T r adi ng
20% Paper mi l l i ng
36%

Paper Packagi ng
38%

Source: Company, RHBRI

EARNINGS REVIEW

♦ Earnings CAGR of 35.5% (from 2005-2009). Over the last four years, Muda has chalked up a commendable
earnings CAGR of 35.5% (from 2005-2009) driven by continuous expansion in both its paper mills division as well
as paper packaging division. In FY08, Muda recorded its highest revenue and earnings of RM782.3m and RM45.6m
respectively as high energy prices, shortage of raw materials and increase in other operational costs in the paper
industry drove up prices of paper products. At the same time, the strong demand for Muda’s paper products helped
to offset the cost increase during that period. For FY09, however, revenue fell 10.1% yoy as a result of weak
demand and lower selling prices for products during the year arising from the economic slowdown. Net profit,
however dropped 18.6% yoy largely due to higher raw material prices. We note that FY09 operating margin
contracted by 4.3%-pts yoy.

♦ Qoq, earnings grew 11.9% yoy. For 4QFY09, revenue grew 7.2% qoq largely due to higher selling prices and
improved demand stemming from the economic recovery. Operating margin, however, contracted by 3.2%-pts qoq
as margins were eroded by higher material costs. 4Q09 net profit doubled to RM24.6m (RM12.1 in 3Q09) thanks to
deferred tax write back of RM24.9m.

♦ Net gearing improved to 0.5x in FY09 from 0.6x in FY08. As at FY09, Muda’s total borrowings stood at
RM288.6m while its net gearing ratio remained at a comfortable 0.5x from 0.6x in FY08. Cash also grew from
RM20.1m at FY08 to RM26.2 at FY09. For FY09, Muda declared a final tax-exempt DPS of 2.5 sen, which
represented a dividend payout ratio and net yield of 19.8%.

♦ Earnings forecasts. We expect FY12/10 earnings to increase by 50.7% yoy on higher revenue as a result of: 1)
higher selling prices; and 2) improving demand for its products driven by the economic recovery. Assuming Muda
maintains its annual tax-exempt dividend of 2.5 sen p.a., this represents a dividend payout ratio and net yield of
14.1% and 2.8% respectively.

RISKS

♦ Risks to our view. The risks include: 1) sharp spike in raw material prices; and 2) slower-than-expected global
economic activities, which could dampen the demand for industrial paper products; and 3) delays in expansions
plans, which could dampen future earnings growth.

♦ Mitigating factors. Given that Muda’s contracts with customers are on a monthly basis, the company is able to
pass on cost increases to customers, albeit with slight time lag (2-3 months). Management is of the opinion that
global economic recovery is on the way and demand for industrial paper products should improve moving forward
as there are no alternatives for industrial paper products that are as cost effective and environmentally friendly. As
for delays in expansion plans, management mentioned that the new expansion plan is currently on track and the
additional capacity is set to start commercial production by 4QFY10.

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VALUATIONS

♦ Fair value of RM1.37 per share. Muda is currently trading at FY12/10 PER of 5.3x compared to its 3-year
average historical forward PER of 4.5x. As seen in table 2, we compare Muda to companies that have similar
business divisions and produce goods related to Muda’s portfolio of products. By applying a 25% discount to the
FY10 regional peers sector average of 10.7x, we obtain a target PER of 8x. We have applied the discount to reflect
Muda’s smaller size, i.e. revenue and market capitalisation. Pegging a target FY10 PER of 8x suggests a fair value of
RM1.37/share for Muda.

Table 2: Comparative Valuations

FY09
FY09
Bloomberg Market cap Operating
Company Revenue FY09 PER (x) FY10 PER (x)
ticker (US$ m) Margin
(US$ m)
(%)
Box-Pak BPAK MK 29.0 49.0 7.4 5.3 12.3
Ornapaper OPB MK 8.4 48.6 6.0 n.a. 6.0
Public Packages PP MK 14.5 40.8 5.3 n.a. 9.6
HPI Resources HPI MK 24.1 107.0 4.0 4.0 8.2
Nine Dragon 2689 HK 7,485.0 1,690.4 27.6 20.1 13.4
Lee & Man 2314 HK 3,978.6 1,242.4 22.8 16.0 5.0
Sunshine Paper 2002 HK 146.9 218.6 25.5 16.2 7.3
Climax International 439 HK 42.9 9.0 n.m n.m -59.0
Come Sure 795 HK 102.0 79.2 n.m n.m 6.9
Hop Fung 2320 HK 67.4 118.9 9.2 7.8 7.9
Taiwan Pulp &Paper 1902 TT 435.9 3.9 n.m. n.m. -6.0
Hansol Paper Co 004150 KS 454.0 1.2 10.4 5.6 10.0
Simple average 11.4 10.7
MUD MK 83.1 217.7 7.1 5.3 5.7
Muda Holdings
Source: RHBRI and Bloomberg

Table 3. Earnings Review

FYE Dec (RMm) FY06a FY07a FY08a FY09a
Turnover 613.4 696.0 782.3 702.9
Turnover growth (%) 5.4 13.5 12.4 (10.1)
EBITDA 19.9 41.7 78.4 40.0
EBITDA margin (%) 3.2 6.0 10.0 5.7
Dep & Amort 0.0 0.0 0.0 0.0
EBIT 19.9 41.7 78.4 40.0
EBIT margin (%) 3.2 6.0 10.0 5.7
Net interest expense (17.3) (18.8) (17.2) (14.5)
Associates (15.7) 0.0 0.0 0.0
Pretax Profit (13.2) 22.9 61.3 25.6
Tax (7.5) (5.9) (10.1) 14.3
Minorities (2.3) (2.6) (5.7) (2.8)
Net Profit (23.0) 14.4 45.5 37.1
Core net profit (7.3) 14.4 45.5 37.1
Core Growth (%) n.m. 162.7 216.0 (18.6)
Source: Company Data, RHBRI estimates

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
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from time to time have an interest in the securities mentioned by this report.

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher
risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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