■ We upgrade NTPM to Add from Hold, with a higher TP of RM0.75. NTPM’s mid-term recovery has not been priced in at current valuations, in our view.

■ We see stabilising pulp prices and higher utilisation rates for its tissue paper products capacity driving an FY24-26F EPS CAGR of 63%.

■ Our GGM-based (prev P/BV-based) TP valuation of RM0.75 implies a 13x FY4/26F P/E, similar to its pre-2018 mean.

Pulp price decline and stabilisation to drive margin repair

We think the 5.9% pt yoy drop in NTPM’s gross margin to 43.6% in FY4/23 was due to an uptick in raw material costs with pulp prices contributing c.49% of cost of sales. Pulp prices rose c.62% between FY21 and FY23 which led to a c.10% pt decline in margins over the same period. As pulp prices have corrected c.32% YTD, we expect pulp prices to stabilise, resulting in a margin recovery in FY24F. This, together with higher utilisation of its tissue paper products capacity, should take gross margins back to 47.5% in FY24F, in our view. 

Strong brand and exports expansion to drive sales growth

We estimate that NTPM will return to positive earnings in FY24F, delivering an FY24-26F EPS CAGR of 63%, fueled by a 9% CAGR in its tissue paper product volume sales and a normalisation in gross margins (from 43.6% in FY23 to 51.7% in FY26F) as raw material costs stabilise. Based on our observations, NTPM’s tissue paper products, namely PREMIER and Royal Gold, have a keen following among its more affluent clientele, with these two brands helping to ensure NTPM’s 45-50% market share in the consumer tissue market industry over the last 20 years despite the entry of two foreign players and the aggressive pricing strategy of its main competitor, Kimberly Clark. With its strong brand name and customer loyalty, as well as consistent expansion into the exports market and volume, NTPM has managed to maintain a 12-year tissue paper product sales CAGR of 5% over FY12-FY23. While utilisation of its tissue paper products capacity hit a low of c.50% in FY23, management said utilisation has since risen to 55% as of Aug, driven by growth in demand for its tissue paper products in both local and export markets.

Long term ROE recovery requires stable pulp prices

We upgrade NTPM to Add from Hold with a higher target price of RM0.75 (prev. RM0.421) based on a Gordon Growth Model (GGM) to better capture its medium-term profitability and growth trajectory. Our GGM assumes a recurring 11.0% ROE (based on FY26F), an 9.0% COE and a healthy 4% LT growth. At RM0.75, NTPM’s implied FY4/26F P/E multiple of 13x is similar to its pre-CY18 mean, when pulp price volatility spiked. As shown in Fig 10, a 1% increase in pulp prices leads to a 7% decrease in FY24F core net profit. Should pulp prices rise to c.US$700/tonne, we estimate this to lead to an FY26F ROE of 7% (see Fig 10), which would take our target valuation to RM0.26/sh. Downside risks include increase in raw material prices, freight costs or a weaker ringgit, increase in market competition intensity and lower growth in capacity utilisation rates.

Source: CGS-CIMB Research - 25 Sep 2023