By Eu Hong Chew
ASIA File Corporation Bhd (Asia File) is today a global stationary company with operations in Malaysia and Europe. Malaysia only accounted for about 11% of the group’s revenue with the bulk of the balance from Europe.
Many traditional industries such as newspapers and taxis are being disrupted by digital technology. Many would agree that the stationery industry is a candidate for disruption.
A chart of Asia File historical performance relative to the 2008 levels showed that:
- Revenue grew initially due its European merger and acquisition (M&A) programme as part of the company’s plan to be an international integrated filing company. Revenue began to decline when the M&A programme was completed.
- Gross profitability has declined implying reducing margins.
- Net profit has been volatile over the past 13 years and in 2020, it dipped below the 2008 level.
This is not a growth business. The relative revenue of Asia File and a number of its Bursa Malaysia-listed peers over the past 13 years as shown below reflects the challenging industry.
As can be seen, except for Asia File, the rest of the peers’ current revenues are at about the same levels as their respective revenues in 2008. Note that for many of the peers, the revenues were from global sales.
This situation has impacted Asia File’s returns.
- From 2008 to 2010 the average ROE was 16 %, but for the past 3 years, it averaged 8 %.
- It was 6 % for 2020.
One may think that the group is not generating enough returns for the shareholders.
But this is misleading because only about 34% of the funds (as of end-Sep 2020) were deployed for the filing business.
- The group has a total capital employed of about RM 670 mil.
- Of these about RM230 mil is used for the filing business. The balance of RM440 mil was tied up in investments and cash.
If you consider only the profits and total capital employed for the filing business, you will find that the stationery business achieved an equivalent of about 21% return (based on average historical pre-tax profit over total capital employed).
It is the RM440 mil 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 RM45 mil positive cash flow annually over the past 12 years.
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, differentiate between product disruption and supply chain disruption.
- An example of the former is e-mail disrupting the traditional paper-based mail.
- An example of the latter is how Amazon has disrupted the brick-and-mortar bookstore.
The former will intensify competition and impact margins. The stationery industry has experienced several consolidations over the past decade as a result of this.
How has Asia File met the challenges of consolidation?
- It is with new products – both production and product innovation – and cost control.
- They have also talked about re-shaping the business models, new markets and deepening customer engagements.
These have enabled Asia File to continue to be profitable. But one can see declining revenue and margins.
However, the impact of digitalisation is generally about the entry of non-traditional players into the stationery market.
Stationery products cover a wide range of materials such as paper, writing instruments, drawing devices, filing and storage products, and greetings 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.
Many global stationery market reports still opined that the industry has yet to go the way of the newspaper industry. Most researchers still forecast growth.
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-strategised marketing by embracing digital technology and tapping into the vast potential of e-commerce.
- Asia File has stated that it will not pursue further expansion into the stationery product sector.
Thus, its future will depend on how it re-invents itself.
There is still time
Consider the following when you assess the prospects of Asia File.
- The stationery business is a cash cow.
- The potential disruption by digital technology is still unclear giving the existing filing business some runway to continue to be profitable.
- The group is financially strong, thus giving it time to seek a diversification path.
For Asia File to improve its ROE, it will have to deploy more of its capital into productive assets.
- Cash and investments are not going contribute much to the bottom line.
- But any new venture has to be sizeable, and the group has yet to show that it is ready for such an investment.
The positive side is that the group had a successful track record in transforming itself into international integrated filing company. But this was in an industry that it was familiar with.
This time it has to re-invent itself. This will probably mean that Asia File could be in a different business sector in a decade’s time.
At the close of today’s morning session, Asia File was up 4 sen or 1.83% at RM2.22 with 8,900 shares traded, thus valuing the company at RM432 mil. – Jan 22, 2021
Datuk Eu Hong Chew was on the board of i-Bhd from 1999 till 2020. As Group CEO, he led its transformation from a digital appliance manufacturer into the developer of i-City, the Selangor Golden Triangle.
This article was re-purposed from “Is Asia File a Value Trap?” that was first published on i4value.asia. Refer to the article for more detailed fundamental analysis.
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.