KUALA LUMPUR: HwangDBS Vickers Research has upgraded Pelikan International to a Buy with a new target price of RM1.70 from RM1.35.

It said on Tuesday, Nov 10 the Pelikan Group could be looking at net profit of RM150 million post-acquisition (100% stake in Herlitz).

"Assuming the acquisition adds a more conservative RM15 million contribution to FY10F net earnings, we estimate a 35 sen/share enhancement (based on 8.0 times price to earnings), which would effectively lift our target price to RM1.70 (from RM1.35).

Pelikan is acquiring 66% stake in Herlitz for 45 million euros (6.25 euros a share) and remaining 34% via voluntary general offer at an offer price of 1.85 euros.

Herlitz, listed on the Frankfurt Stock Exchange, is a stationery company that specializes in office products. It has strong market presence in both Western and Eastern Europe. The total purchase consideration for 100% stake in Herlitz is at 52 million euros.

Although Herlitz was loss-making, the transacted price appears cheap against the acquired assets net asset value of 104.5 million euros. The acquisition will be funded by bank borrowings, which will increase group gearing to 0.6 times from 0.5 times (post-rights issue), and lift group net asset value to RM1.91 (vs RM1.58 pre-acquisition).

The acquisition is subject to shareholders and authorities approval and is scheduled for completion by 1Q10.

"We are positive on the acquisition although Herlitz is currently loss-making on the back of potential positive synergies to be derived.

"This would include a wider product range (80% of Herlitz’s products are different from Pelikan), different geographical market concentration, cross selling opportunities, streamlining of logistic operations, wider distribution network, and costs savings in production, procurement and marketing," it said.

HwangDBS Vickers Research said following the streamlining exercise, the Group may dispose some unutilized assets and facilities and use the disposal proceeds to pare down bank borrowings.