Reiterate buy at RM1.02 with a lower target price of RM1.26 (from RM1.94): Pelikan’s 3MFY10 results were broadly in line with house expectations, despite revenue achieving only 11% of FY10 estimates. The company reported a net profit of RM111.4 million, but after adjusting for RM143.1 million negative goodwill and RM41.9 million merger expense due to the Herlitz acquisition, as well as RM2.7 million forex loss (1QFY09: RM400,000), its 3MFY10 adjusted net profit was RM12.9 million which achieved 15% of our FY10 estimates. Likewise against consensus, Pelikan achieved 12% and 17% in revenue and adjusted net profit of FY10 consensus estimates respectively.

Despite 1QFY10 contributing only 11%-12% of FY10 estimates, the full impact from Herlitz’s revenue will be felt from 2QFY10 onwards as Pelikan consolidated Herlitz as a 66% owned subsidiary from March 18. In addition, the RM50 million cost savings imputed into our earnings model from the Herlitz acquisition is expected to materialise only in 2HFY10.

Pelikan’s 1QFY10 revenue was negatively affected by the weakening euro, which has dropped about 20% against the ringgit. 1Q adjusted net profit improved due to lower financing costs as total borrowings have decreased 27% year-on-year to RM295 million, while the weaker euro may have resulted in finance costs savings as well.

For 1QFY10, despite revenue growth in Italy and other parts of Europe, Pelikan suffered a contraction in Ebit (earnings before interest and tax) for all major markets except for Latin America. Europe’s recovery remains fragile due to the ongoing Greece debt crisis, as well as the risk posed by the highly indebted PIIGS (Portugal, Italy, Ireland, Greece and Spain) economies.

Nonetheless, Pelikan derives almost half of its revenue from Germany, whereby the government in April reiterated its 1.4% 2010 GDP growth forecast, although the IMF in March trimmed its forecast to 1.2% from 1.5%.

We reiterate our buy rating on Pelikan while making no changes to our earnings estimates. However, we are lowering our target price from RM1.94 to RM1.26, as we peg a lower PE (price-to-earnings) multiple of seven times (previously 10 times) to mid-FY11 EPS (earnings per share) of 18.1 sen. We adjust our PE multiple lower by 30% due to the headwinds caused by the European sovereign debt crisis.

Key risk factors to our view are (1) integration risks, (2) failure to reap targeted synergies and (3) a declining euro which results in foreign currency translation loss. — ECM Libra Investment Research, May 26