■ We deem 1QFY4/24 core net profit of RM0.6m in line with our full-year core net profit forecast of RM25m as we expect margins to widen from 2QFY24F.

■ Sequential operating margin recovery leads us to believe that stable pulp prices and higher capacity utilisation will drive FY24-26F EPS CAGR of 63%. 

■ Reiterate Add, with an unchanged GGM-based TP of RM0.75.

1QFY4/24 core net profit expectedly weak with better times to come

● For 1QFY4/24, NTPM recorded a core net profit of RM0.6m against our/Bloomberg consensus full-year core net profit forecasts of RM25m/RM8m. We deem this to be in line as we expect NTPM’s operating margins to widen further from 2QFY24F as it pairs lower-cost inventories with increased capacity utilisation rates.

● Management has also reiterated its commitment to paring down debt of c.RM50m and converting its US$-denominated debt into RM-denominated debt to enjoy interest rate differential of c.2.5%, which should help reduce interest expenses.

Operating margins expand for second consecutive quarter

● 1QFY24 EBITDA margin rose 1.4% pts qoq to 9.7% (-0.7% pt yoy) as growth in revenue was higher than the increase in operating costs, making it the second quarter in a row where NTPM’s operating margins have improved. Although 1Q24 EBITDA margin was still lower than our full-year estimate of 10.7%, we believe NTPM will continue to see growth in the demand for its products in the local and export markets, which will drive higher utilisation of its capacity and better margins moving forward as raw material costs of both its segments stabilise from their highs at end-CY22.

● Tissue paper products’ segment revenue grew 2.5% yoy and 2.1% qoq, which NTPM attributed to higher local sales, especially to restaurants, malls, hotels and other commercial buildings. The higher sales coupled with lower raw material costs, which were partially offset by increased interest expenses and insurance premiums, narrowed pretax losses in the tissue paper products segment by 42.7% yoy to RM3.4m.

● Personal care products’ segment revenue also rose 4.3% yoy and 9.1% qoq due to an increase in average selling prices. However, this segment saw higher raw material prices, mainly for fluff pulp, the prices of which doubled to US$1,400/tonne in 4QCY22. This has since corrected by c.30%, which should help the segment’s operating margins to recover. The jump in raw material costs alongside higher interest expenses pushed down personal care products’ segment PBT by 32.7% yoy and 12.1% qoq.

Reiterate Add, with an unchanged TP of RM0.75

● We make no changes to our EPS estimates, Add call and GGM-based TP of RM0.75 (FY26F ROE: 11.0%, COE: 9.0%, LT growth: 4%). 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. Should pulp prices rise to c.US$700/tonne, we estimate this will lead to FY26F ROE of 7%, which will take our target valuation to RM0.26/share. We see improving earnings from stabilising pulp prices and higher utilisation rates for its tissue paper products (FY24-26F EPS CAGR of 63%) as the key re-rating catalyst. Downside risks include increase in raw material prices and freight costs or a weaker ringgit, more intense market competition and lower-than-expected capacity utilisation rates.

Source: CGS-CIMB Research - 26 Sep 2023