TGUAN guided for a 10% sales volume growth for its plastics products in FY24, buoyed by its stretch film division. It recently viewed a shrink film machine that uses up to 50% recycled input, and is investing in new warehouse in Rawang to optimise its operations. We maintain our forecasts, TP of RM2.86 and OUTPERFORM call.

We came away from a recent engagement with TGUAN feeling reassured of its long-term prospects. The key takeaways are as follows:

1. TGUAN guided for a 10% sales volume growth for its plastic products in FY24 (which is in line with our assumption), driven by the stretch film division as its customers replenish depleting inventories. To recap, its stretch film division accounted for half of its total revenue in FY23.

2. Its food wrap division has also seen an uptick in orders, particularly from the US and Middle East. This surge, especially from the US, is attributed to a newly recruited local sales representative. Nevertheless, challenges persist for the courier bag division, prompting a production capacity reallocation towards loop-handle bags for the European market. The sales at other divisions (including industrial bags and garbage bags) have remained relatively stable.

3. It recently commissioned its tenth nano stretch film machine. Originally slated for commissioning in mid-FY23, TGUAN had decided not to rush it given the soft market condition. Fast forward to the present, on the back of a recovery in demand, the line will cater to the US and Europe, with contribution streaming in from May 2024.

4. TGUAN’s personnel were recently in China to view a shrink film machine which costs about USD500k (RM2.4m). This machine with a production capacity of 200MT/month will appeal to sustainability- conscious customers as it could produce film containing 30%-50% recycled content. This compares favourably to its existing Germany- made machine which is three times more costly and only produces films from virgin resin.

5. TGUAN is building a new RM6m warehouse in Sungai Buaya (near Rawang), Selangor. Spanning over 40,000 sq ft, TGUAN will use it to centralise its operations, optimise space utilisation and enhance logistics for both its plastic products and the F&B division.

Forecasts. Maintained.

Valuations. We also keep our TP of RM2.86 based on 11x FY24F PER, at a discount to the sector’s average historical forward PER of 13x to reflect TGUAN’s low share liquidity. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Investment case. We continue to like TGUAN due to: (i) the growth potential from exports as more competitive local players, such as TGUAN, gain market shares from overseas producers, (ii) its aggressive push into Europe and US markets with environmentally-friendly, high-performing products, and (iii) its expansion plans for premium products, such as nano stretch films, courier bags, food wraps and some industrial bags (wicketed bags, oil/flour/sugar bags). Reiterate OUTPERFORM.

Risks to our call include: (i) a sudden surge in resin costs, (ii) weak demand for packaging materials due to prolonged global recession, and (iii) supply chain disruptions.

Source: Kenanga Research - 3 May 2024