Business  Profile

• An established flexible packaging manufacturer in Asia. Operating f rom plants located in Tampoi (build-up area 150k sq feet) and Senai new plant (to be commissioned by 2Q17), Johor, Tomypak (listed in 1996) is the 2nd largest f lexible packaging materials manufacturing company in Malaysia w ith 25-30% market share. More than 90% of the Grou p’s reven ue is der ived f rom th e recessio n-resilient F&B, cosmetics, toiletries, pharmaceutical and prophylactics sectors etc. Investment

Highlights

• Experienced and dedicated management team. Equipped w ith impeccable trac k record during their tenure in transforming Johot in and Pharmaniaga, w e are conf ident that Mr Lim Hun Sw ee (MD) and Mr Tan See Yin (ED) w ill succeed in bringing TOMYPAK to greater heights in the years to come af ter joining the company in 2014.

• Still growing despite stiff operating environment. The f lex ible packaging industry w ould be underpinned by the relat ive defensive nature of F&B and FMCG segments as w ell as continuous new product innovation targeted at new and existing customers.

• Post-expans ion, management is looking to grow the domestic (single digit grow th pa) and exports (15-20% pa) sales, in line w ith the projected populat ion grow th and fast grow ing acceptance of pac kaged food products. To recap, export market share has grow n f rom 43% in 2011 to 55% in 2015, w ith key overseas markets f rom the Philippines (40% of FY15 export revenue), Singapore (20%), Russia (15%), Af rica (10%), Thailand and Brazil (15%).

• Natural hedge mitigates currency impact. TOMYPAK benef its f rom a w eak RM as over 50% of revenue is der ived f rom export market. The still w eak Ringgit (HLIB forecast of RM3.80-4.00/US$) against average RM3.91 in 2015 is likely to cont inue the favourable impact on its bottomline. That said, given that ~70% of raw materials are imported, it w ill also provide a natural hedge in the event of a sharp appreciation in RM.

• 1 rights and 1 free warrant for every 2 TOMYPAK shares . TOMYPAK had obtained the necessary approvals to implement the proposed 1:2 r ights issue at RM1/share, w ith one f ree w arrant (strike price: RM2.29) for every rights share subscribed (ex-date: early June). Proceeds f rom the rights issue (~RM54m) combined w ith internal generated funds w ould be suf f icient to fund phase I of its expansion plan (construction of plant and machiner ies) on a 10.5 acres industrial land (built-up area of ~265k sq feet) in Senai, w hich could conservatively inject additional capacity of ~5k MT in FY17 and 10k MT in FY18, respectively.

Catalysts

• Credible team; expanding MNCs clientele (local and overseas ); normalisation in consumer spending & attractive rights pricing.

Risks

• Execution risk, w eak exports, sluggish consumer spending, price w ar.

Forecasts

• Earnings resilience. We expect earnings to grow by CAGR of 13% in FY16-18, banking on margins expansion, posit ive grow th of its anchor customer, Nest le, grow ing overseas markets and low er effective tax rates in FY17/18 (reinvestment allow ance of ~RM50m f rom new expansion). Margins are likely to improve amid bet ter product mix, low raw material prices, products innovations & R&D, cost savings and greater ef f iciencies f rom new machineries and better production f low s.

Rating/ Valuation

• We see TOMYPAK a good proxy to potential recovery in consumer spending in 2H16 and still weak RM. Ascribing a 15% discount (due to smaller market cap) to DA IBOCI’s (direct compet itor) P/B, TOMYPAK is fairly valued at RM3.02 (Ex-rights FV is RM2.35).
• On P/ E basis, TOMY PAK’s 1 3.7x P/E is also at a 26% discount (11.9% if based on diluted 16.3x P/E) to DAIBOCI, supported by DY of 3.5% and FY16-18 EPS CAGR of 13%.
• Action: We see great opportunity for investors to participate in the rights issue to ride on the capac ity expansion. Pricing of rights is attractive at 51% discount to RM2.04 (Theoretical ex-rights price/TERP). Despite EPS dilut ion of ~33% (excluding w arrants conversion), TOMYPAK is still trading at big discounts of 26% and 28% to DAIBOCI’s FY16-17 P/E, respectively.

Source: Hong Leong Investment Bank Research - 10 May 2016