EVEN as more and more companies are going paperless with the advent of new technology, paper files and other old school filing products won’t be going out of style for some years to come. At least, that’s what Micheal Lim Soon Huat, group chairman and managing director of Asia File Corp Bhd, believes, judging from the demand for his company’s filing products.

“It came as a surprise to me as well that sales volumes have not dropped since the introduction of the iPad three years ago,” Lim tells The Edge in a phone interview. The proliferation of iPads and other tablets, he says, was seen as a potential threat to the filing products business. Other threats included cheaper hard disk storage space, cloud computing and free virtual storage.

While the stationery business may not be seeing exponential growth, Asia File has proved that it can still be very profitable. The reason: a well-consolidated market with few existing players, which gives Asia File a good amount of volume to remain profitable, he explains.

Many may not know that Asia File, which is synonymous with the ABBA brand of filing products, is a major player in the UK and is making its presence felt in the European market. It has the lion’s share of the UK filing products market — more than 60% — and up to 90% of the market for dividers and indices in Continental Europe.

The company’s 2013 annual report shows that it derives about 70% of its revenue from Europe. And it should find itself in a sweet spot as the European economy continues to improve.

Net profit for the third quarter ended Dec 31, 2013, rose 49% to RM15.43 million, or 13.16 per share, from RM10.35 million, or 8.89 sen per share, a year ago while revenue increased 18.5% to RM93.46 million from RM78.9 million previously.

Many of its competitors in the UK have bowed out over the years, but Asia File has beaten the odds and stayed profitable. According to a fund manager, Asia File has managed to maintain an operating margin consistently higher than that of its competitors by 10% to 15% each year. Its strength lies in its fully integrated manufacturing system and lean and efficient operations.  

Lim explains that Asia File “has strong control” of its supply chain.

The company, which has been in the UK since 1996, seems to have a knack for spotting good buys as well. When Europe was shaken by a financial crisis in 2011, the company took the opportunity to acquire a UK paper mill that produces paper and paperboard for a bargain at £1 million, using internally generated funds. The acquisition gave it control over the supply of its raw materials.

Asked if Asia File has recouped its investment, Lim laughs and replies, “Definitely!”
It also acquired the largest dividers and indices OEM player in Germany in 2008 for €13.8 million to gain a strong foothold in Europe. More recently, Asia File took over manufacturing equipment from manufacturers in France and the Czech Republic.

“Europe is a way bigger market than the UK. There are a lot more opportunities there for us,” says Lim. The company, he adds, is looking at a few potential opportunities and may pursue these when the time is right.

However, it has not all been a bed of roses. Asia File felt the bite of the recent financial crisis, particularly in FY2011, when sales slid by 7.6% to RM247.1 million while net profits declined 12.65%. The company had to keep selling prices flat during the period. Lim adds that the drop in the exchange rate for pounds and euros did not help.

Revenue increased by 20.9% to RM323.38 million from FY2010 to FY2013, but net profit slid to RM43.24 million, from RM57.69 million, mainly due to a decline in contribution from associates. But its operating profit saw a 7.66% rise in FY2013 from the previous year.

With things looking up in Europe, Asia File’s selling prices could be due for a re-pricing in FY2014, CIMB Research says in a report. However, Lim says the company has no intention of raising prices, at least for the next six months, after which a review will be carried out.

He says the existing plants run at 70% capacity, with the 30% buffer reserved for months when strong sales are expected,  typically when back-to-school season starts at the beginning of the year.

As at Dec 31, 2013, the company had a cash balance of RM47.98 million against borrowings of RM27.19 million. Asia File also holds a 20% stake in listed paper-based product manufacturer Muda Holdings Bhd, which has a market capitalisation of RM506.38 million.

In the past year, Asia File shares have gained 121.28% to close at RM7.22 last Thursday. However, share liquidity is an issue. Fund managers interested in the stock find it difficult to get their hands on the shares. With only 25 million shares out on  the open market, representing 21.53% of the 116.3 million  shares outstanding, they are hard to come by, says one fund manager.

Lim and his mother, Datin Khoo Saw Sim, through their private vehicle Prestige Elegance Sdn Bhd, hold the biggest chunk with a 44.99% stake, while Skim Amanah Saham Bumiputera has  26.31%.

As at March 31, 2013, Asia File’s balance sheet shows a share premium balance of RM18.33 million in its reserves, implying  it would be possible for the company to introduce more shares into the market.

A bonus issue or share placement, should it take place, might help improve trading liquidity for the stock, which currently has a market cap of RM833 million.

For now, after gaining some 20% in less than a month to close at RM7.16 last Friday, the stock has exceeded CIMB’s RM6.15 fair value for it.

This article first appeared in The Edge Malaysia Weekly, on March 31, 2014.