• FY23 core net profit of RM81.1m, while down 23.8% yoy, was in line at 100.2% of our FY23F estimates and 95.6% of Bloomberg consensus’.

• The earnings decline yoy was due to a high base effect from a strong FY22. Demand should return to pre-Covid levels moving forward, in our view.

• We reiterate Add on TGI, with an unchanged GGM-derived TP of RM2.74, implying an FY25F P/E of 7.9x (0.5 s.d. below its mean).

FY23 core net profit in line

• Thong Guan Industries (TGI) recorded an FY23 core net profit of RM81.1m, which was in line at 100.2% of our FY23F estimates and 95.6% of Bloomberg consensus’ forecasts. The 23.8% yoy decline in core net profit was due to: 1) weakness in the group’s plastic packaging segment from softer demand, and 2) an impairment of trade receivables during the fourth quarter. On a positive note, TGI’s F&B and other consumables segment saw revenues expand 6.9% yoy to RM123.8m (Fig 2).

Demand normalisation evident, return to pre-Covid growth levels

• TGI recorded a 12.1% yoy decline in its plastic packaging revenues (Fig 2), which was largely attribute to lower sales volumes of its garbage bags, courier bags and food wraps. This was coupled with overall lower ASPs across its plastic packaging segments as raw material prices declined. As discussed in our note “Falling back to historical trends”, dated 9 Jan 2024, we note that TGI benefited greatly from the global spike in demand for plastic packaging products in FY20-22. We believe demand has since normalised, and we forecast a 7.6-12.5% p.a. growth in revenues for FY24-26F, in line with historical pre-Covid trends.

Reiterate Add, with TP of RM2.74

• We maintain out Add recommendation on TGI, with a GGM-derived TP of RM2.74 (employing an FY26F ROE of 10.0%, required return of 9.7%, and long-term growth rate of 3.5%). Our TP implies a 7.9x FY25F P/E multiple, which is 0.5x below its historical mean (Fig 5). FY24-26F dividend yields of 3.2-4.3% should lend support to share price. Key re-rating catalysts include: 1) increase in export demand for plastic packaging products, 2) stronger local demand for F&B and consumable products. Key downside risks are weaker-than-expected demand for plastic packaging globally, and F&B and consumable products domestically.

Source: CGS-CIMB Research - 29 Feb 2024