ipo_7239_070703

Scanwolf Corporation Berhad [ 1 ] New Listing Company Note

03 July 2007

Scanwolf Corporation BerhadTime To Get Noticed!

For Internal Circulation Only

IntroductionScanwolf Corporation Berhad is marching its way into the Second Board of BursaMalaysia on the 16th July 2007. The company, through its subsidiaries, designs andmanufactures plastic extrusions, PVC compounding, processing of PVC coils, tradingof industrial consumables, sales and marketing of PVC extruded building materials andtrading of other building materials.

Subscribe Scanwolf for its capabilities of being an integrated manufacturer of plasticextrusions and its move to further penetrate into other Asian markets such as Thailand,Indonesia, Vietnam, Philippines and India. We value the stock at RM0.86 based on asector PE of 8.8x.

Key Reasons for Investment Consideration1) Integrated Manufacturer of Plastic Extrusions. Scanwolf Corporation Berhad has

the in-house capabilities and expertise to provide customised solutions to meet thediverse needs and specifications of customers such as:• Product design and development which includes assisting customers with

product conceptualisation and colour matching services• In-house design and fabrication of dies which is critical to the extrusion process

and the quality of output• Multi production line to perform large volume production runs• Multi colour extrusion and wide colour range supported by in-house

compounding and colour matching services• In-house secondary operations including online four-tone printing, wrapping

and laminating of decorative foils or tapes, and slitting processes.

Analyst : Michelle Teh E- : [email protected] : 20721277 ext 1604

Fair Value RM0.86(+14.7%)

Sector : NA Bloomberg : SCW MK

SHARE INFO

Listing 2nd BoardEnlarged Share Cap (m) 80.0Market Cap @ RM0.75 (RMm) 60.0Par Value RM0.50Public Issue (m) 6.0Issue Price (RM) 0.75Estimated Free Float (%) 21Closing Date 3rd July 2007Tentative Listing Date 16th July 2007Major Shareholders (%)

Loo Bin Keong - 29.82Zakaria Merican bin Osman Merican - 19.27

Tan Sin Keat - 10.47Leuk Sing King - 10.47

KLCI : 1,364.37

New ListingTuesday, 03 July 2007

Com

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UTILISATION OF IPO PROCEEDS

RM'000 %Repayment of Bank Borrowings 9,500 43.6Capital Expenditure 6,200 28.5Working Capital 4,076 18.7Defray Estimated Listing Expenses 2,000 9.2Total 21,776 100.0

RATIO & ANALYSIS

FY08NTA/share (RM) 0.52P/NTA @ RM0.75 ( x ) 1.4ROE (%) 8.86ROA (%) 11.7Net Gearing ( x ) net cash

Earnings Summary (RMm)

FYE 31 Mar RMm FY05 FY06 FY07 FY08(E)Revenue 22.5 27.3 31.4 35.5Gross Profit 7.80 9.9 11.2 15.1EBITDA 5.9 8.0 8.9 10.6PBT 4.3 6.0 6.1 7.8Tax (1.0) (1.0) (0.7) (0.7)Net Profit 3.3 4.9 5.4 7.1EPS sen 7.6 11.3 12.4 8.9PER x 9.9 6.6 6.1 8.5Dividend sen na na na 2.5Diviend Yield % na na na 3.3Gross Profit Margin 34.7% 36.5% 35.6% 35.0%EBITDA Margin 26.2% 29.3% 28.4% 29.9%PBT Margin 19.0% 21.8% 19.5% 22.0%Tax Margin 22.7% 17.0% 11.8% 9.2%Net Profit Margin 14.7% 18.1% 17.2% 20.0%


03 July 2007

2) Diverse Customer Base. Unlike its industry peers, earnings risk arising from singlecustomer concentration is mitigated by wide range of customers involved in variousindustries. Cumulatively, the company has a total of 600 customers worldwide and70% of its top 20 customers have been dealing with the company for 5 years or more.

3) Wide Market Coverage. FY07, the export market contributed RM19mn (60.3%) tothe group's revenue. It markets to a total of 28 countries (including Malaysia). Thediversification of markets aids the company to minimise the dependency on any oneparticular country. Management targets to export 70% of its total revenue. Below isthe breakdown:

Export Markets Revenue FY07RM mil %

Thailand 3.488 11.2Bangladesh 2.831 9.0Indonesia 2.420 7.7Vietnam 1.807 5.7Iran 1.629 5.2Philippines 1.483 4.7United Arab Emirates 1.332 4.2Export Market 18.960 60.3Local Market 12.466 39.7Total Group Revenue 31.426 100.0

Source: Prospectus

4) Strong Market Reputation & Established Track Record. The name Scanwolf hasbeen in the market since 1984. As highlighted earlier, Scanwolf has been in town foryears and went unnoticed.

In 2006, the company ranked first among manufacturers of Plastics Extruded Edgingsand Profiles in Malaysia based on sales value of local production. In the same year,the market size of he Plastic Extruded Edgings and Profiles in Malaysia was estimatedat RM120mn based on sales value of local production. The company's market sharewas estimated at 25%.

Also, currently the company has 6 foreign distributors. The distributors rely ontheir own distribution network to reach sub-distributor and end-users. Distributorsare listed below:

Distributor CountryScanwolf Thailand Co., Ltd ThailandScanwolf Philippines Manufacturing Inc. PhilippinesPT Malindo Jaya IndonesiaDong Luc Hong VietnamAhmad Kabiri Jazeh IranPartnership Morocco Malaysia Corporation Morocco

Source: Prospectus

5) In-House Profile Design Capabilities. The company has the ability to customiseand this is considered critical, as application and designs are very diverse. Thecompany has in-house die design and fabrication capabilities. Cumulatively thecompany has a total of approximately 800 designs of extruded products since. Ofthese, 300 are still active designs. Above this, the company manufactures at least 20colour options for each design,

6) R&D Capabilities. This capability enables the company to sustain and grow thebusiness through the development and improvement of existing and new products.It helps to increase revenue and profitability and lower the cost of production viaimprovement to the manufacturing processes. It will be able to have optimal usageof automation and machine integration and use of recycled materials through in-house compounding. Management mentioned that they have intentions to utilisedry blending (powder) and stop usage of pallets to cut out one of its processes.FY07, the company has spent half a million Ringgit (1.58% of Group's turnover)specifically on R&D.


03 July 2007

Business OverviewThe group structure is depicted in the chart below:

Once Upon A TimeIt all started in 1984 when Mr. Loo Bin Keong (CEO) together with two other directorsnamely Mr Tan Sin Keat and Mr Leuk Sing Kong formed a partnership under the nameof Scanwolf Plastics Engineering Consultant Firm to manufacture PVC pipes and conduitsand plastics extrusion for furniture fittings. To date, they have 22 solid years ofexperience in the plastic extrusion industry.

What Does Scanwolf Do?Below is briefly of Scanwolf Corporation Berhad's business activities:

Source: Prospectus

100%

100%

Scanwolf Corporation Berhad (SCB)

Scanwolf Plastic Industries Sdn Bhd (SPI)

Scanwolf Building Materials Sdn Bhd (SBM)

12.2 %5.0 %1.7 %81.1%

Business Activities

Design &Manufacture of

Plastic Extrusions

PVC Compounding Processing of PVCCoils

Trading

PVC Edging

PVC Jointings

PVC FoamProfiles

PVC ExtrudedBuildingMaterials

PVC TPEEProfiles

ABS Profiles &Edging

PVC WrappingProfiles

PVC Compounds Thin PVCEdging

IndustrialConsumables

Other BuildingMaterials

Source: Prospectus

Application of Plastic ExtrusionsThe table below shows the various industries that use plastic extruded products. Pleaserefer to appendix for its products and applications.

FurnituresAutomotiveInterior Fit-OutsKitchen & Wardrobe SystemPromotional Display & Exhibition SystemPallet SystemsLight Racking SystemOffice EquipmentPicture Frames


03 July 2007

What Lies Ahead1) Expansion of Product Range. Scanwolf intends to develop rigid PVC vertical and

horizontal blind profiles, flexible Polymer Filaments, polymer picture frame profiles,polymer decorative profiles, new extruded building materials (plasterwork trim profiles& step nosing profiles) and Calendered PVC Film.

2) Expansion of Production Facilities. Currently the company has 2 twin-screw and 9-single screw extrusion machines. It intends to purchase 3 twin screw machines. Thecommissioning of these machines in Nov07 will boost capacity by 62%, from theexisting 2,909 tonnes to 4,724 tonnes. These 3 twin screw machine is equivalent to6 single screw machines. Contribution to the revenue will only be evident in FY08.However they intend to maintain 80%-85% capacity for ad-hoc projects and testing.

3) Main Board. Scanwolf is determined to list on the Main Board of Bursa Malaysia in3-4 years time. It will pay shareholders a dividend of 2.5sen per share and theremaining would be retained to facilitate its main board transfer.

4) Overseas Business Expansion.• Thailand & Indonesia. The company intends to acquire an equity stake in

Scanwolf Thailand Co. Ltd and PT Malindo Jaya by end 2009. Following itsacquisition, it will set up a manufacturing plant in each country by 2010. Thereason to move into Indonesia with its lower and medium end products is thecountry's population.

• Vietnam. The company intends to form a joint-venture with Dong Luc Hong, atrading house and also present distributor in Vietnam to further strengthen itsexisting presence in the country. The company is currently in negotiation phase.

• Philippines. The company intends to acquire an equity stake in ScanwolfPhilippines Manufacturing Inc., the Group's sole distributor in Philippines by2009.

• India. The company intends to establish a sales office in India by 2010.Management mentioned this would take place at a later date because of highbarrier for market penetration.

• Exhibitions. Main sources for the company to increase its revenue are exhibitions,distributors, trading houses, manufacturers, MITI and internet. The companywill be participating in the exhibitions in Las Vegas and Brazil next year. Some ofthe exhibition and trade fairs the company participated in are listed below:

Exhibition Participated Location DateMalaysia

Malaysian International Furniture Fair Kuala Lumpur Mar02,03,06,07Asianwood Woodtech Trade Fair Kuala Lumpur Sept05Export Furniture Exhibition Kuala Lumpur Mar05Malaysian Furniture Export Exhibition Kuala Lumpur Mar03,04

InternationalInterzum Guangzhou 2006 & 2007 China Mar06,07Indiawood 2006 India Feb06Index Dubai 2003,2005 & 2006 UAE Oct03, Nov05 & 06Interzum Cologne 2003 & 2005 Germany May03 & Apr05International Exhibition of Furniture, Fittings & Upholstery 2005 Russia Nov04Firniteno Indonesia 2002 Indonesia Nov02WORLDBEX 2005 (via distributor) Philippines Mar052nd International Kitchenware & Equipments Exhibition of

Iran (via distributor) Iran Jun06

Source: Prospectus


03 July 2007

Probable Issues1) Repayment of Bank Borrowings. As of May 2007, the company has bank borrowings

which comprise of trade facilities, hire purchase and term loans amounting toapproximately RM19.1mn. RM15.3mn is outstanding and RM9.5mn from the IPOproceeds will be utilised to repay the bank. The facilities have been utilised tofinance the working capital requirements and capital expenditure of SPI, theirsubsidiary.

2) Price of Raw Material s & Petroleum. Main raw materials used in manufacturingare PVC Resins, plasticisers, stabilisers and PVC Coils that contribute approximately69% of total raw material purchases for FY07. Petroleum products are the majorfeedstock for plastic resins including PVC Resins and a range of other raw materialslike plasticisers, used in the manufacturing of Plastics Extrusions. Similarly, petroleumproducts are the major feedstock used in manufacturing PVC Coils. The prices ofPVC Coils are also dependent on the price of petroleum. However any significantincrease in raw material cost can ultimately be passed on to customers but thisremains a threat.

3) Exposure to Foreign Exchange. FY07, export sales was 60% and import purchaseswere 32%. These were mainly denominated in USD. To the certain extent that thereare timing differences between collections and payments and for those amountwhich are not covered by natural hedge, the company may be exposed to anyadverse fluctuations of the USD against RM. Management mentioned that theimpact would be minimal.

4) Foreign Workers. As of May07, the company has approximately 41% foreign workers(mainly Nepalese). Their employment in Malaysia is subject to annual renewal bythe Ministry of Home Affairs. As such, any non renewal of foreign workers' permitand any changes in regulations and policies i.e., lowering of the number of foreignworkers permissible to be employed by the company or an increase in levy, mayadversely affect the company.

Lower Effective Tax Rate & Subsidy1) Reinvestment Allowance. All manufacturing companies that have been in operation

for at least 12 months and incur qualifying capital expenditure to expand productioncapacity, modernise and upgrade production facilities, diversify into related products,and automate its production facilities can obtain a Reinvestment Allowance. Thecompany's subsidiary, SPI is enjoying this incentive.

2) Import Duty Exemption. The company has been granted import duty exemption onspecific raw materials and components for the manufacture of specific finishedgoods. Raw materials that were granted import duty exemption by the Ministry ofFinance are PVC Resins, Coating Oil and PVC Rigid Film. Exemptions are given till19th July 2008.

3) Diesel Subsidy. The company is also granted diesel subsidy by the Ministry ofDomestic Trade and Consumer Affairs for 7,200 liters per month since January 06.

ValuationWe are valuing the company, we draw a parallel to Tek Seng Holdings Berhad, V.S.Industry Berh and LCTH Corporation Berhad which offer similar but not exactly thesame type of product and services. Hence, we arrived at a fair value of RM0.86 inputtinga sector PE of 8.8x and an annualised FY07 EPS of 9.7sen. This gives an upside potentialof 14.7%. Together with a 3.3% dividend yield, total appreciation is an attractive 18.0%.Note that additional potential revenue contribution by the new machines has not beentaken into account. Subscribe.

Peer Comparison

Company Price (RM) Market Cap EPS (sen) PER (x)2-Jul-07 CY07 CY07

Tek Seng Holdings Berhad 0.505 121.2 5.6 9.0V.S. Industry Berhad* 3.760 143.8 40.8 9.2LCTH Corporation Berhad 0.545 327.0 6.2 8.8Sector PER (market cap weighted) 8.9Scanwolf Corporation Berhad 0.75 60.0 9.7 7.7


03 July 2007

Edgeband Profiles Roller Shutter

Extruded Building Materials Extruded Building Materials Foam Profiles

Appendix (Source: Scanwolf)

Products


03 July 2007

The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinionsare subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We acceptno liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interestin the securities and/or companies mentioned herein.

for TA SECURITIES HOLDINGS BERHADYaw Chun Soon, Executive Director - Operations

DISCLAIMER

TA Securit ies Holdings Berhad(A Participating Organisation of Bursa Malaysia Securities Berhad)

Menara TA One, 22 Jalan P Ramlee, 50250 Kuala Lumpur. MalaysiaTel : 603 - 2072 1277. Fax : 603 - 2032 5048

(14948-M)

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