• NippeCraft is trading at 0.4x P/B and 0.6x net cash of S$0.069/share.
• Stationery sales, under its brands Collins and Debden, fell by an average 11.9% over the last 5 years.
• Trading in pulp products forms the bulk of revenue (~90%) and held up the bottomline.

Nippecraft's FY20 Was Marginally Profitable

• NippeCraft (SGX:N32) was marginally profitable at US$0.06m in FY20. ROIC of 3.3% was a turnaround from two years of negative return. This was attributed to reduced losses at stationery sales and a higher share of the profitable pulp trading operations. That said, it also enjoyed US$0.6m in COVID-related job support from the government.
• NippeCraft's balance sheet has net cash of US$18m that facilitates the trading business through its ability to secure trade finance lines. Accounts receivable days have risen to 81 days (FY19: 75 days) but is still manageable at 22% of sales. Due to the cash holdings, EV is negative US$7.9m.

Stationery

• NippeCraft develops and markets writing materials and lifestyle products under its brands Collins and Debden.
  • Collins is a leading stationery brand in the UK and Australia that dates back to early 1800’s in the UK.
  • Debden was introduced into Australia and New Zealand in 1978.
• The products are sold through a network of distributors of revenue.

Pulp Trading

• Trading in pulp products forms the bulk of revenue (~90%). The customers are pulp producers, traders and paper product manufacturers. The contracts are back-to-back, and Nippecraft does not hold open position on price or quantity.
• Net cash of US$18m in its balance sheet enables NippeCraft to secure trade finance credit for the trading business. About 50% of trades are booked with related companies under the Asia Pulp & Paper Group. As these contracts are lumpy, one third-party Malaysian customer accounted for 23% and another HK customer 12.7% of turnover in FY20.

NippeCraft's Operational Performance

• Stationery sales fell by an average 11.9% over Moleskine, the global brand for notebooks and journals held under listed D’leteren rebound from Q2. Australia’s business conditions have improved with jobless rates down to a 17-month low of 5.1% in May. The economic recovery will underpin demand for consumer discretionary.
• On the cost front, NippeCraft's management is customers’ demand. It will also shorten the delivery lead-time from production to delivery to the sales channel. While this might raise the cost of production, increased demand certainty will cut down on inventory obsolescence.

Potential Earnings Catalysts

• The potential earnings catalysts are:
  1. It plans to launch new lifestyle lower costs;
  2. The rise in e-commerce is fueling demand for corrugated carton scrap paper, lifting pulp demand.

Source: SAC Capital Research - 28 Jun 2021