Consumers of personal care products may not know the name Eng Kah Corp. But many will have come across the products that it manufactures for major players in the cosmetics and toiletries industry like Johnson & Johnson, Unilever and Avon.
It is an established contract manufacturer of perfumes, cosmetics, toiletries, skincare and household products, and the only one listed on the Main Board.
Last year, the company began manufacturing Reckitt Benckiser's Dettol range of hygiene products. It recently secured contracts from Australian retail chain Coles Myers as well as Alliance Cosmetics, a local agent for brands like Revlon, Avene, Elancyl, Silkygirl and Wet 'N' Wild.
Eng Kah is currently developing higher-margin skincare, hair dye and colour cosmetic products that can engender product loyalty. It also offers its services in the design and packaging of the products.
To clear its backlog of orders, which stands between 10% and 20%, the company recently built a new plant next to its existing one in Bayan Lepas, Penang. When that plant, its fourth, comes on stream by year-end, its manufacturing capacity will increase by 56%. (The company also has plants in Nilai, Negri Sembilan and Shah Alam, Selangor.)
Analysts at Standard & Poor's (S&P) and K&N Kenanga Securities are calling a "buy" on the stock with 12-month target prices of RM3.99 and RM4.10 respectively. The price targets suggest a potential upside of between 17% and 21% from Eng Kah's RM3.40 close last Friday. S&P, which trimmed earnings projections and its target price to RM3.99 in early August, retained its "buy" recommendation as well.
"Eng Kah's profitability remains strong... Its ability to add new customers is positive as it reduces dependence on key customers," it says.
"What sets Eng Kah apart is its ability to offer the entire range of cosmetics and skincare products at competitive prices. Eng Kah now manufactures about 1,000 products for a wide array of long-term customers that include multinational corporations [MNCs], direct-selling companies, trading companies, department stores and beauty salons. Ongoing research and development constantly generates an average 200 to 300 new formulations and improvements per year, giving Eng Kah a steady stream of products to pitch to its clients," says K&N Kenanga in a note dated Aug 28.
"Eng Kah's strong growth prospects have so far only been constrained by capacity. This will be solved by the recent expansion, with its new Bayan Lepas and Nilai plants easing the backlog of orders and allowing for new contracts," says K&N Kenanga.
The brokerage sees Eng Kah benefiting from the Asean Free Trade Area agreement as MNCs look to reap tax savings and other benefits of producing in Asean. The Asean Cosmetic Directive that comes into effect in January 2008 will allow cosmetic products registered or marketed in any Asean country to be sold in all other member states without undergoing stringent product qualifications in each country.
Clinching these MNC clients would mean more than a bottom-line boost for Eng Kah. International labelling policy requires MNCs to list the manufacturer's name in addition to the country of origin.
"It will raise the firm's profile and work as a form of indirect testament to Eng Kah's product quality as an original equipment manufacturer," says K&N Kenanga.
Eng Kah's products are already being exported to countries beyond Asean, such as Hong Kong, Japan, Taiwan, Australia and Saudi Arabia. At present, 75% of its revenue still comes from Malaysia. The local cosmetics and toiletries market, which is worth RM2.2 billion, is growing at about 13% annually, providing ample room for growth.
Another plus for Eng Kah is Malaysia's well-developed palm oil industry, which allows the company to procure 70% of its raw materials like high-quality soap noodles, fatty acids, esters and glycerine from a range of suppliers.
The company's earnings have grown 23.8% from 2002 to 2005, with revenue growing at a four-year compound annual growth rate of 14% over that period. K&N Kenanga expects Eng Kah's earnings to grow 18% to RM17.2 million this year, on the back of a 16% top-line growth to RM91.7 million.
"Eng Kah is in a strong net cash position of RM24.6 million and looks set to continue in that vein. We have estimated an operating cash flow in FY2006 to FY2008 to come in between RM17 million and RM24 million... We have forecast a FY2006 gross dividend per share of 23 sen, based on management guidance," it says.
While Eng Kah's net profit of RM6.95 million for the first half ended June 30, 2006, is only 40% of K&N Kenanga's forecast, the brokerage has maintained its profit estimate as it expects a stronger second half.
Meanwhile, another Penang base manufacurer Hi-City Bioscience Group Bhd managing director Heah Chew Teng @ Heah Kim Teik has reduced his stake in the company after disposing of three million shares representing 3.75% equity recently.
After the disposal, Heah holds another 16.2 million shares or 20.25% direct stake in Hi-City Bioscience.
Tag: Cosmetic : Beauty :Malaysia: Health & wellness Biotechnologyklse
