Is Asia File a Value Trap? (Part 1 of 2)

Value Investing Case Study 02-1: An analysis of Asia File's performance and business model to show why it is not a value trap. This article was first published in Jul 2020. There is now an update that incorporated the 2020 results. Revision date: 20 June 2021

Asia File is currently trading at RM 1.85 (as of 1 July 2020) per share compared to its NTA of RM 3.06 (based on 31 Mac 2020) per share.

Is this a value trap?

As a Group in the “brick and mortar” stationery business, you may wonder whether the market is pricing the Group because of:

The current economic situation, OR
Poor prospects in the digital economy.

We have seen many traditional industries such as newspapers and taxis being disrupted by digital technology. Many would agree that the stationery industry is a candidate for disruption.

But I would argue that it is premature to link the potential disruption to Asia File's current share price ie there is a market mispricing.

Join me in a 2-parts post as I lay out my case on why Asia File's value is still going to be intact and even grow in the near future.

It is not a value trap as the intrinsic value is still there.

There is definitely an investment opportunity given the mispricing. Does it mean that you should go and buy – well read my Disclaimer!

Part 1 is presented here while Part 2 was published on 19 July 2020. Refer here, for the June 2021 update.

This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. Learn more.

Is there Anything Special about the Group’s Expertise?
Is there Concern about how it Uses its Funds?
Is the Current Performance Outstanding?
Tracing the Group’s Rich and Unique History
Is there a Great Future?
Pulling it all together

Valuation Date	1 July 2020
Company Name	Asia File Corporation Berhad
Stock Name in Bursa Malaysia	ASIAFLE
Company’s Bursa Co	7129
Bursa Malaysia Sector	Consumer Products & Services
Listing Date on Bursa Malaysia	1996
Financial Year End	March
Latest Quarterly Results	4th Quarter 2020, 31 Mac 2020
Shareholders’ Equity	RM 626 million (31 Mac 2020)
Market Capitalization	RM 360 million (1 Jul 2020)
Corporate Website	https://www.asia-file.com

Table 1: Company Info

Case Notes

My normal analysis covers the past 12 years period ie about one business cycle. In normal circumstances, the financial statements and other information that I relied upon are readily available from the past 12 years' Annual Reports.

However, in the case of Asia File, the Annual Reports were available only up to 2019. For FY 2020, only the unaudited results for the year were available when the analysis and valuation were done.

As such while most of the financial analyses were till FY 2020, some of the analyses that required detailed geographical, segmental, or operating info can only be analyzed up to 2019.

So do not be surprised to see that some parts of the analysis covered a 12-year lookback period while others covered a 13-year lookback period (2008 to 2020).

However, this does not change the overall assessment.

The point about the period covered is that from a value investment perspective, you are trying to get a sense of the business prospects over the longer term. As such looking at quarterly results will not provide such a picture. Looking at how the company performed over a decade may give a better sense.

I hope that what I have done can be used as a template for your analysis of other companies. What would you do if you are not interested in doing your own analysis but still want to be a value investor? One way is to rely on other experts to assess and value companies for you. Those who do this well include people like Seeking Alpha.* Click the link for some free stock advice. If you subscribe to their services, you can then just read their analysis and assessment.

Is there Anything Special about the Group’s Expertise?

The Asia File Group is an integrated file manufacturer with a wide range of products made from paperboard, plastic, and metals.

The Group has six production and warehousing sites in Malaysia. It also has two files producing plants and one paper mill in the United Kingdom and another two production facilities in Germany.

Asia File remains the No 1 file manufacturer in Malaysia with its ABBA brand and a comprehensive distribution network of more than 750 retailers, wholesalers, and office suppliers.

It has also successfully established itself as one of the top filing suppliers in the United Kingdom and parts of Europe. Its products are sold in more than 80 countries with sales offices set up in Germany, United Kingdom, United States, Middle East, and Singapore.

In 2017 the Group diversified into the disposal food ware business with a budget of RM 30 million. But for FY 2019 and possibly FY 2020, the contribution from food ware is still not significant.

The Group is actually an international player as Malaysia only accounted for about 11 % of the Group’s current Revenue. In terms of the non-Malaysian revenue, Europe accounted for about 85% of it.

Is there Concern about how it Uses its Funds?

The Group has a total capital employed (TCE) of RM 657 million as of the end of Mac 2020, with SHF accounting for about 95 % of it. But only about 38 % of the TCE is deployed for its operations.

The balance is held as cash, investments in securities, as well as the 20% shareholdings (captured as Non-Operating Assets in the table) in Bursa-listed Muda Holdings Bhd.

You can look for yourself from the table and chart.

Items	Ref	RM million
Shareholders’ Equity	SHF	626
Minority Interests	MI	0
Total Debt (incl lease)	Debt	31
TCE		657

Items	Ref	RM million
Net Operating Assets	Net OA	251
Net Financial Assets	Net FA	238
Non-Operating Assets	Non OA	168
Total		657
Table 2: Sources and Uses of Funds (31 Mac 2020)

Chart 1: Sources and Uses of Funds (31 Mac 2020)

Although the Group did not provide a breakdown of its funds by geographical location, I estimated that (refer to Note 1) about 60 % of the Net Operating Assets are for the international operations.

Is the Current Performance Outstanding?

The Group reported a PAT of RM 36.9 million for the FY 2020, about 23 % lower than that for the same period last year.

Chart 2: Performance Index

The results are in line with the long-term trend as shown in the Performance Index chart.

Revenue growing
Gross profitability declining to imply reducing margins.
PAT has “yo-yo” over the past 13 years and in 2020 it dipped below the 2008 level

This has impacted returns. From 2008 to 2010 the average ROE was 16 %, but for the past 3 years, it averaged 8 %.

Item		2018	2019	2020
Revenue	RM m	351.8	327.8	293.4
PAT	RM m	59.3	47.8	36.9
Gross Profitability (Note 2)	%	20	17	4
ROE	%	10	8	6
Debt to SHF & MI ratio		0.1	0.0	0.0
Table 3: Past 3 years’ Performance

You may think that with a 6 % ROE in 2020, the Group is not generating enough returns for the shareholders.

But this is misleading because only about 38 % of the funds (as at Mac 2020) were deployed for the filing business. The balance was tied up in investments and cash.

The chart below shows how the funds have been deployed and that the return on TCE for the filing business is equivalent to 21 % (PBT basis). Good.

It is the RM 407 million that has not generated sufficient returns and pulling the overall return down.

The filing business is also a cash generator. Even after accounting for capital expenditure, it generated about RM 45 million positive cash flow annually over the past 12 years.

Chart 3: Segment Performance

Note: a) TCE was estimated = SHF + MI + Loan + Lease liabilities. b) The PBT for the filing business excluded associate income, rental income, interests, and gains from investments c) The average Revenue and PBT is 12 years time-weighted.

Tracing the Group’s Rich and Unique History

Over the period from 2008 to 2019, the Group grew its revenue by almost 60% with the majority of this from Europe.

Sales from Malaysia were stagnant despite the fact that the Malaysian GDP grew more than 50% during this period. It meant that its share of the economy got smaller.

Nothing to shout about for the No 1 stationery brand.

Chart 4: Group Historical Revenue

The Group ventured into Europe in the late 90s and by 2004, Europe was the top revenue contributor. But the big growth came from a series of acquisitions

2008 – the Group acquired 2 German dividers manufacturers that resulted in increased sales in 2009 from Germany, Norway, and Switzerland.

2012 – The Group acquired a paper mill and a filing company in the UK giving the Group strategic control from supply to distribution.

While the Group spent about RM 100 million for these acquisitions (including RM 30 million in goodwill), it more than recovered the investments. A value-added M&A exercise.

Over the years the Group continued to face cost pressures eg exchange volatility, GST, but as can be seen from the chart, they were able to meet the challenges. Key points

The average gross profit margin declined from about 44 % for 2008 – 2010 to about 28 % for 2018 to 2020.

However, it managed to keep the Selling, General, and Admin expenses under controlled although it spiked in 2009 when it first met a different operating environment after the German company acquisition.

Chart 5: Group Historical Profits

Although the Malaysian business did not grow, its 20 % stake in Muda Holdings has added value as its initial investment of RM 45 m in 2008 is recognized as RM 168 million in 2020 due to the post-acquisition reserves. A gain of 273 % since 2008. Well done.

Is there a Great Future?

The common understanding is that the stationery industry is ripe for disruption by digital technology. But when you look at secular changes to the industry, you have to differentiate between product disruption and supply chain disruption.

An example of the former is email disrupting traditional paper-based mail. An example of the latter is how Amazon has disrupted the brick-and-mortar bookstore.

The future of the Group comes down to how it has responded to such secular changes. When I looked at the strategic direction of the Group through its Annual Reports, 3 things stood out

1. About 2 decades ago, Asia File started to establish itself as an integrated international filing Group. This led the Group to expand its facilities in Malaysia as well as to acquire a number of companies in the UK and Germany that gave it access to new markets.

2. The Group direction took a new tone when in 2013, it started to mention the consolidation taking place in the industry, both from the competitor as well as the customer perspectives. This message about consolidation was repeated in several subsequent Annual Reports.

3. Then in 2017, the impact of digital technology on the industry was first mentioned.

We should differentiate between the impact of consolidation (mainly a supply chain impact) and the impact of digital technology (a product impact).

The former will intensify competition and as stated in the 2019 Annual Report will “exert pricing pressure and impact margins.”

It is about existing industry players acquiring/merging with other industry players. The impact is bigger and stronger groups vying for the same market

It is also about customers merging and giving them stronger bargaining power.

However, the impact of digitalization is generally about the entry of non-traditional players into the stationery market. A good example of this is email replacing the historical pen and paper mail.

It is companies like Google and Microsoft entering the “office communication” market. In contrast with the consolidation phenomenon, the impact of digital technology is the disappearance of the market for traditional products.

It is also highly possible that the impact of digital technology may have been the catalyst for the consolidation taking place in the industry.

Asia File faces both phenomena.

How has Asia File met the challenges of consolidation?

It is with new products, both production and product innovation, and cost control measures. They have also talked about re-shaping the business models, new markets, and deepening customer engagements.

The important thing is whether this has worked.

I believe that the stagnant Malaysian revenue over the past 12 years at a time when the Malaysian economy grew more than 50% reflects an average grade performance.

I would have given the Group an A grade if there was growth. As it is, they are running on a “business treadmill” sweating with all the effort but still remaining in the same place.

However, the revenue from its international operations did not show a similar sideways trend probably because the Group was expanding into new markets and with new products. This new market-new product growth masked the impact of consolidation in the industry.

What about digital technology?

Stationery products cover a wide range of materials such as paper, writing instruments, drawing devices, filing and storage products, and greeting cards.

Asia File, with its focus on filing products, operates in a niche segment.

With such a wide range of products, it is not clear nor pre-ordained that the whole industry’s products would be disrupted by digital technology. The stationery industry is not like the taxi industry that with so little product segmentation, the taxi industry as a whole is being disrupted by the likes of Uber and/or Grab.

Based on several excerpts of global market reports as per below, the stationery industry has still not gone the way of the newspaper industry. Most researchers still forecast growth.

IBISWorld sees an average US industry decline of 0.06% from 2015 to 2020.

Global Industry Analysts predict a positive future for the global stationery industry with demand for stationery supported by growing literacy rates and a growing number of start-ups and office expansions.

Grand View Research valued the global stationery products market size at USD 90.6 billion in 2018 and is expected to expand at a compounded annual growth rate (CAGR) of 5.1% over the forecast period. Growing literacy rates across the globe and an increasing number of youths inclining towards higher education are among the prominent factors for market growth.

Technavio which has been monitoring the office stationery and supplies b2b market said that the industry is poised to grow by USD 29.14 bn during 2020-2024, progressing at a CAGR of almost 3% during the forecast period.

To come back to what Asia File has done to address the impact of digital technology.

It has ventured into the food ware business in 2017. This is still insignificant today

It has re-strategized marketing by embracing digital technology and tapping into the vast potential of e-commerce. But I could not find any specific indication of success from these.

Probably too early to see the impact of this plan.

Conclusion 1 – do not expect any quantum leap in growth from the current stationery business as I suspect that given the consolidation and digital threat, Asia File is not likely to undertake any other M&A exercise to either expand beyond filing products or to buy into new markets. Any growth for this traditional stationery segment will be organic.

Conclusion 2 – it looks like there may be further diversification based on tapping into its existing manufacturing expertise. But I am not sure about whether it would venture into a completely different field.

Conclusion 3 - there is no evidence that its value is diminishing. While not conclusive, it does support the argument that it is not a value trap. But join me in Part 2 as I present further evidence for this investment thesis.

Pulling it all together

One of the tenets of value investing is the concept of the margin of safety ie buying at a discount to the intrinsic value.

This discount is supposed to give you a bargain. However, the bargain is only one side of the intrinsic value coin.

The other side is the value trap. Your assessment of the intrinsic value could be wrong and your investment goes downhill.

Which side of the coin does Asia File fall?

The conclusions from Part 1 of the analysis seem to suggest that it is more of a bargain than a value trap. But to be sure, you need a better understanding of the intrinsic value and risks.

Join me in Part 2 to find out the answers.

End of Part of 1of 2

Part 2 was published on Sun 19 July 2020

There is now a 20 Jun 2021 update

Notes

1) Estimated by comparing the 2007 Balance Sheet with the 2019 Balance Sheet ignoring cash and investments in associates and assuming all the growth came from the international operations.

2) Gross profitability = gross profit margin / total assets

Reading guide

If you are a first-time visitor to this blog, you may not be familiar with some of the concepts that I have used in my analysis and valuation. I suggest that you check up the Foundations series - Fundamentals 01, Fundamentals 02, and Fundamentals 03. I also have a Definitions page in case you are not familiar with the terms I have used.

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I am not an investment adviser, security analyst, or stockbroker. The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies. Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them.

The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such.

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