• 1Q16 on a weaker tone. TOMYPAK posted a 1QFY16 core net profit of RM4m, excluding forex losses of RM0.5m. The 3MFY16 net profit came in at 19.8% of our full year forecast of RM20m. Overall, the weak earnings (-34.2% QoQ, - 18.5%YoY) were largely due to increased cost of production arising from increased cost of imported raw materials (average RM3.62/US$ in 1Q15 vs RM4.19 in 1Q16), higher energy and labour cost, forex uncertainties and production shutdown during CNY.

• Great opportunity for LT investors to accumulate. Despite the earnings hiccup, we still see values in TOMYPAK and recommend LT investors to buy on dips as management indicates that 1Q16 results could be the trough of the year and 2Q16 could improve marginally and expect a stronger 2H16 in anticipation of potential recovery in consumer spending and export markets. Overall, the flexible packaging industry would be underpinned by the relative defensive nature of F&B and FMCG segments as well as continuous new product innovation targeted at new and existing customers.

• We see TOMYPAK a good proxy to potential recovery in consumer spending in 2H16 and still weak RM. Ascribing about 15% discount (to account for smaller market cap) to DAIBOCI’s (direct competitor) P/B, TOMYPAK’s TP is RM3.02 (Ex-rights TP RM2.35).

• Action: We see great opportunity for investors to participate in the rights issue (refer FIG1) to ride on the capacity expansion. Pricing of rights is attractive at 51% discount to RM2.05 (Theoretical ex-rights price). Proceeds from the rights issue (~RM54m) combined with internal generated funds would be sufficient to fund phase I of its expansion plan (construction of plant and machineries) on a 10.5 acres industrial land (built-up area of ~265k sq feet) in Senai, which could conservatively inject additional capacity of ~5k MT in FY17 and 10k MT in FY18, respectively.

• Gapdown refilled on 20 May, expect another upleg to revisit RM2.84-3.00 zones. Technically speaking, the bullish Marubozu candle on 20 May (rebounded 13 sen higher to RM2.58 prior to the rights entitlement date announcement after market closed) has refilled the 11sen gapdown on 19 May (due to a weak 1Q16 results). We believe the stock is ripe again to launch another wave of uptrend, in anticipation of potential price appreciation ahead of the ex-rights date on 1 June, supported by the bullish falling wedge pattern. § A decisive breakout above immediate resistance at RM2.65 (50% FR) could take the next leg up towards RM2.73 (61.8% FR) and RM2.84 (76.4% FR) before retesting our LT objective at RM3.00. On the flip side, key supports are RM2.49 (20-d SMA) and RM2.39 (support trend line AA1). Cut loss at RM2.36.

• Positive risk to reward ratio with 16.3% upside against 8.5% downside. All in, we see an attractive risk to reward ratio for investor with a theoretical entry price of RM2.58 given that the downside to the cut loss zone of RM2.36 is 22 sen (-8.5%) while the upside to the LT price objective of RM3.00 is 42 sen (+16.3%).

Source: Hong Leong Investment Bank Research - 23 May 2016