Story: Man Wah recently proposed a 1-for-1 bonus share issue for shareholders to improve share trading liquidity. This replaces a proposal earlier in November for a rights share and warrants issue that has since been scrapped. Our fair value is revised higher to S$1.18; using a similar 10x blended FY08/09 PER, and after removing the potential dilutive effect of a warrants issue.
Point: Man Wah’s share price is currently trading at 6.3x FY08 PER and 4.5x FY09 PER (financial year ended March), which is undemanding even if we factor in the current market weakness. Indeed, at our fair value, the use of 10x blended FY08/09 PER represents about 50% discount to its peers’ current 19x. We project 52% net profit CAGR for Man Wah in our FY08-10 forecast periods, which implies an attractive 0.2x PEG at our new fair value.
Relevance: Our recent conversations with management indicate positive sales outlook for both its export and domestic markets in October/November, while the stable raw material price trend is likely to support a normalised gross margin of 30% in 2H08. Hence, we have kept our net profit estimates unchanged at HK$176.7m in FY08 and HK$243.6m in FY09. Maintain BUY.
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