Yes, Tissue Paper. You heard us correctly. Tissue Paper. Ya.... Tissue Paper. We are not here to promote any brand, but on a serious note, do use more tissue papers during this pandemic..... Jokes aside, as always, we are here to do an in depth analysis on "Premier" brand which is currently owned NTPM Holdings Berhad.

NTPM Holdings Berhad was founded by the current Chairman Mr. Lee See Jin in 1975 and started the "Premier" brand in 1995. The Company at present has three (3) manufacturing facility in Nibong Tebal and one (1) manufacturing facility in Vietnam.

The Brand
NTPM main business comprise of two segments. The main two segments are the sale of paper products (i.e. tissue papers) and sale of personal care products.

"Others mainly refer to countries such as Australia, New Zealand, Papua New Guinea, Solomon Island, United States and other countries in Africa, East Asia and Southeast Asia"

The expansion made by the Company in Thailand and Vietnam has been fruitful in consistently contributing 4% and 6% of their revenue respectively for FY20.

NTPM Past Financial Performance

From here, we begin to deep dive into the financials of NTPM and identify what went wrong over the past 3 years (i.e. 2018, 2019 and 2020) where their profit start declining from RM 49 million in 2017 to only RM 6.2 million in 2020. Between 2015 and 2016, NTPM manage to sustain a margin of 8% to 9% and the profit margin began to decline in 2018 to less than 1% in 2020; although sales have been constantly increasing steadily year on year.

Cash flow from Operating and FCF Analysis

At present, the operating cash flow of NTPM financials, can be considered as quite worrying. The Company has been on a borrowing spree from 2018 to 2020 from RM 158 million in 2017 to RM 427 million in 2020, that’s a 170% increase within a period of three (3) years. Based on the above graph, the Company has increased its capital expenditure tremendously in 2018, 2019 and 2020. Free cash flow is currently trading at a negative position of RM 62 million. We have still yet to see the return on investment of such huge capital expenditure made.

Expense Analysis

The cost of goods sold, employee benefits expenses, transportation and depreciation and utility cost constitute the top four (4) of the major cost for NTPM for the financial year ending 2020. In essence, fluctuation of raw material will have significant impact on their bottom-line performance which we have seen during the year 2018/2019 where the Company’s margin got eroded tremendously.

Cost of Goods Sold Analysis
The cost of goods sold for NTPM has been increasing YOY from 2015 to 2020; from RM 248 million to RM 402 million over the past 6 years which derived at a CAGR of 8.36%. To reduce the overreliance on pulp, the Group has been actively promoting the usage of post-consumer waste recovered fiber (50% post-consumer). The Company currently owns one of the largest wood fiber storage warehouses in Malaysia, which collectively measure 15,000 sq metres, we promote the collection and storage of use office paper for recycling instead of ending up in the landfill. To achieve this, the Company collaborate and work closely with all the major waste paper collectors and industrial printers in Malaysia.

During the profitability analysis, we could observe that the profit and margin of NTPM have dropped rapidly during 2018, 2019 and 2020. Many investors are wondering what happen during 2019 and 2020 when pulp price started dropping rapidly as well during mid of 2019, but the company did not manage to take advantage of the low pulp price. Performing an expense analysis have given us a better picture of what happen during 2019 and 2020.
Still confused? Continue reading to get the full picture.

The Company cost of goods sold have been increasing over the years as the they were stocking up of the raw materials at a crazy, ya, real crazy pace. The Group has been stocking up higher raw material as they were anticipating higher potential sales from customers. Unfortunately, this event turns out to be an ugly one as the Company is purchasing/ stocking up more raw material at a faster pace than converting it to finished goods and sell it out.

As shown in the above graph, the finished goods are not growing at a faster pace and this leaves the group with more raw material in their warehouse at a higher purchase cost. Based on the above graph, the group began stocking up inventory in 2018, 2019 and 2020. During these three years, the raw material (i.e. pulp) price is at its peak. Hence, they were unable to take advantage of the drop in pulp price during the end of 2019 and beginning of 2020. So.... Can the Company turnaround?.. Continue reading.

Raw Material Price

The main raw material for the Company is mainly from pulp and waste paper. Base on the chart shown, pulp and waste paper price continue to be on the downtrend.

The China Waste Paper Composite Index tracks the changing market prices in the Chinese paper recycling and recovered paper fiber markets. The Index consists of a weighted basket of specific benchmark grades of scrap and recovered paper. The benchmarks include specific grades of scrap paper stock.

Can the Company Turnaround?

From the above graph and table, we can grasp that the company went on a shopping spree to purchase vast amount of raw materials in 2018 & 2019 respectively; and the timing was bad enough for the company as the raw material price was at its peak from early 2018 to mid of 2019

.Key takeaway: The Company will be able to turn around in the next 2 quarters at minimum, as they have begun stocking up additional raw materials at a lower cost (They have completed utilising all the existing raw material that was purchased at a higher price). The risk would be after 6 months if there is a sudden surge in the pulp price, the Company would have faced another pressure in their gross margin. However, during the AGM, the management highlighted that they do not foresee the surge in pulp price in the near future as there are ample of supply. Alternatively, they will be able to utilize wastepaper as an alternative raw material as well.

NTPM Valuation Part 1 – Review of recent Quarterly Result (FY 21 – Quarter 1)

Based on the recent quarterly result, the Company revenue has fallen from RM 184 million to RM 179 million, a decrease of 3% due lower sales of the Tissue paper products. Although the drop in sales, the company manages to book a profit of RM 14 million compared with the preceding period of only RM 503,000.

As you all may recall during our analysis in the “Cost of Goods Sold Segment”, we mentioned that the Company went on a shopping spree to purchase a huge amount of raw material in 2018 and 2019. During this period, the pulp price was at its peak in which the company would force to finish utilizing the all the raw material that was previously purchased at a higher price (FIFO methodology) before they can stock up more raw materials at a lower price. According to the recent quarterly results, we can be certain that the Company has completed utilizing the higher price raw material and they have started stocking up and taking full advantage of the lower raw material price.

“In the first half of FY2020, the results of Tissue Paper products were adversely affected by the higher cost of raw materials (virgin pulp and recycled paper) consumed which were purchased earlier at a higher cost. The older and costlier raw materials were consumed and sold first, whereas the newer raw materials comprising the most recent purchases at lower cost are still on hand. However, in the second half of FY2020, the cost of raw materials consumed for Tissue Paper products was lower.”

Company 2020 Annual Report

According to RHB Analyst Report on May 06, it stated that “On the lower raw material prices, it said NTPM has stocked up the pulp inventory aggressively for usage until the end-2020.”  In short, we could for see that the Company should foresee that the Company will be able to increase their gross margin to 2015/2016 level (at approximately 55/56% as compared to present of 48%).

NTPM Valuation Part 2 – Projected Earnings and Share Price

• The management highlighted that during MCO, the utilization is about 70% due to some restriction in MCO. Assume that the demand would continue to be robust, in which we believe it will due to Covid-19 and the Company manage to increase its utilization to about 90% (an increment of 20%).
• Assume an increment of 10% in the cost of goods sold (we are expecting the COGS amount to be lowered as compared to the increase in revenue due to lower raw material prices)
• Assuming an increase in 5% of expenses as well during each quarter due to higher cost for repair, maintenance to cater for higher production capacity.

Based on some assumptions above, we could derive a guestimate of the Company financials moving forward:

Note: There were quite a number of assumptions required to be made and the above does not indicate the Company view and it’s solely our own estimate and view moving forward based on our analysis made. Any movement in raw material prices, drop in demand and oversupply scenario would impact the above analysis. Hence, the above analysis is only for illustrative purposes.

Risk

• Debt Level: Worrying debt level. The management responded that they don’t see huge capex expenditure in the near future and their focus moving forward is to reduce the debt level.
• FCF: The Company has been generating a negative free cash flow for the past three (3) years and further reduction in the FCF could be alarming as the Company may decide the call for more fund raising (e.g. right issue, bonds, etc.). However, as of now, their previous quarter has shown a good turnaround in their cash level as well as a reduction in the borrowing as well.
• Raw Material: Significant increases in prices for raw materials, energy, transportation or other necessary supplies or services, without corresponding increases in the Company selling prices, could adversely affect the company performance.

Key Takeaway

• The worse is over for now – The Company has started to reduce its borrowing and capital expenditure; and manage to begin taking advantage of the lower raw material prices. With the reduction in their borrowing and capital expenditure, this would improve the Company’s profit margin moving forward. The consumption of remaining inventory in which the Company bought at a higher price has been completed. The remaining purchase of inventory is at a lower cost which would improve the Company margin significantly.
• Booster from Covid19 – Consumption of tissue paper and sanitizing wipes should be structurally lifted, as hygienic awareness improves due to Covid-19. Even post covid-19, the demand and consumption should increase due to hygiene awareness.
• Revamping Expenses – The Company has put in effort in reducing the expenses through lower advertising and promotional expenses (from RM 10 million in 2015 to RM 3 million in 2020). A consistent reduction in this expenses couple with lower depreciation, finance cost and raw material prices, this will in return boost the company bottom line and profit margin.

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