• Buying interests emerged since hitting YTD low at RM1.69. TOMYPAK’s share price was unjustifiably punished, tumbling 15% from RM1.99 (theoretical ex-rights px on 1 June) to a low of RM1.69 (6 & 7 June) before ending at RM1.86 on 4 July. We reckon that the rout was mainly due to 1) Weak 1Q16 results; 2) Distortion in share prices following the listing of TOMYPAK-OR (6-10 June) as investors opted to sell mother shares (after ex-rights) to subscribe for the rights entitled (@RM1) with free warrants.

• The new 54.73m rights issue together with 54.73m free detachable warrants will be listed today. Although Tomy pak’s share prices could encounter some selling pressure in the near term following the floatation of new rights issue, the divergence in share price and fundamentals presents an opportune window to accumulate as valuations become attractive. At RM1.86, Tomypak’s 12.5x FY17 P/E is trading at 22% discount (FIG1) to Daiboci. Benchmarking P/B, TOMYPAK is also trading at 46% discount to peers’ P/B and 45% to Daiboci’s P/B, respectively (FIG 3). Our LT fair value for TOMYPAK is RM2.36 (+26.9% upside), ascribing about 30% discount (due to its smaller revenue, marketcap and market share) to Daiboci’s P/B of 3.13x on its proforma BVPS of RM1.08.

• We see TOMYPAK a good proxy to potential recovery in consumer spending in 2H16 and still weak RM. Despite the earnings hiccup, we still see values in TOMYPAK and recommend LT investors to buy on dips as we understand from management that 1Q16 results could be the trough of the year and 2Q16 could improve marginally. We can 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.

• What is the upside potential for TOMYPAK-WA? Ascribing a 25%- 40% discount to the average warrant/underlying share assumption of 0.36x (to account for its high strike price and hence rich premium), we believe TOMYPAK-WA is fairly valued at RM0.40-RM0.50 (FIG4) in the short to medium term.

• Poised for a triangle breakout in the medium term (1-3 months) after a brief sideways consolidation. Based on the negative daily slow stochastic indicator, TOMYPAK’s share price may experienc e some selling pressure in the near term following the floatation of new rights issue but it could be well-absorbed amid its strong fundamentals. As long as key supports at RM1.69-1.79 are not violated, we opine that TOMYPAK is ripe to launch another wave of uptrend for a triangle breakout in the medium term. A decisive breakout above immediate resistance at RM1.94 (50-d SMA) could take the next leg up towards RM2.05 (50% FR) and RM2.23 (76.4% FR). On the flip side, key supports are RM1.79 (23 June low), RM1.69 and RM1.62 levels.

Source: Hong Leong Investment Bank Research - 5 Jul 2016