AmInvestment Research downgrades Prolexus to Hold

KUALA LUMPUR: AmInvestment Research has downgraded garment maker Prolexus to "Hold" with a lower fair value of RM1.36 a share from RM1.61 after its weaker earnings and lower price-to-earnings (PE) valuations.

It said on Monday it had rolled over the valuations to CY18F from FY18F as it lowered our PE peg to nine times from 10 times. 

“We believe Prolexus should be trading at a discount to its direct competitor, Magni-Tech Industries (one-year forward PE of 10 times). We regard Prolexus as a marginal garment producer relative to Magni-Tech. The seeming shortfall in terms of execution and competitiveness could undermine its impending capacity expansion,” it said. 

Last Friday, Prolexus reported a 3QFY17 net profit of RM1.6mil (on-quarter: -79%,  on-year: -54%) bringing 9MFY17 net profit to RM15.7mil (on-year: -14%). Earnings came in below our earnings estimates at 50% estimates. 

The 9M earnings typically contribute 60-65% of full-year earnings. 

AmInvestment Research said the earnings shortfall was due to softer-than-expected top-line growth as sales for the quarter declined 15.4% on-year. This stemmed from both its apparel segments as the advertising segment saw marginal growth. The top-line weakness came in spite of the healthy top-line growth by its primary client, Nike. 

Prolexus's gross margins fell to 18.9% versus 19.2% in 9MFY16 due to the lower economies of scale and the higher minimum wage taking effect. 

“Prolexus is expected to complete its double plant expansion in FY18. Specifically, its Vietnam plant and Kluang, Johor fabric mill will commence operations in 1QFY18 and 2QFY18 respectively.

“However in the interim, we expect initial start-up costs and under-utilisation of capacity to initially weigh on margins. 

“We take this opportunity to further cut our margin and growth assumptions to better reflect Prolexus’ prospects. 

“Factoring in changes to our assumptions, we cut our FY17/18F earnings by 15%/3%. Key risks to our forecast include: 1) delays in its Vietnamese and Kluang expansions; 2) further top-line slowdown; and 3) higher-than-expected start-up costs,” AmInvestment Research said.