• Results (FIG1): 3QFY16 results came in with revenue of RM51.6m (-9.3% QoQ, -7.5% YoY) and PATAMI of RM3.5m (-31.9% QoQ, -42.2% YoY). On a 9M basis, despite a 1.3% growth in topline, cumulative 9M earnings totaled RM12.1m, declining -12.5% YoY after adjusted the Esos expenses of RM1.6m and forex gain of RM0.5 (9MFY15: forex gain of RM2.5m).

• Dividends: Declared 2sen for the 3Q16 (ex-date: 8 Dec; payment: 23 Dec).

• Results highlights: Overall, lower revenue was mainly attributed to lower demand from overseas (-13% qoq and -17% yoy), particularly in July 2016. This, together with lower forex gain and Esos expenses of RM1.6m, Tomypak recorded a slide in earnings. However, excluding the exceptional items, 3Q16 core PATAMI only eased 6% qoq but jumped 21.4% yoy. On a 9M basis, excluding the exceptional items, 9M core earnings was RM14.2m, made up 71% of our full year forecast of RM20m which is deemed within expectations.

• Outlook: The external operating environment is expected to continue to be very challenging, triggered by the volatile forex markets which will result in rising cost of production on increased cost of imported raw materials. However, the impact may be mitigated by the revenue from the export sales and resilient local markets amid the defensive nature of F&B and FMCG segments, lower effective tax rates, better efficiency, continuous new product innovations targeted at new and existing customers.
   
• Forecasts: Given the challenging operating environment, we scale back our FY16-18 earnings by 5%, 12.2% and 3.8% respectively.
   
• Rating: Maintain BUY as Tomypak is a good proxy to growing flexible packaging industry, underpinned by the relative defensive nature of the F&B and FMCG segments as well as continuous new product innovation targeted at new and existing customers, supported by decent DY of 3.7%- 4.5% and EPS CAGR of 14.7% for FY16-18.

• Valuation : In line with our earnings cut, our TP is reduced from RM2.20 to RM1.96, which is based on a targeted 15x FY17 earnings (about 22% discount to its closest peer, Daiboci), following a change in valuation matrix from P/B to P/E.

• Technical outlook: Still trapped in LT downtrend channel unless breaking out strongly above upper resistance at RM1.77. After staging a LT downtrend breakout from 52-week low of RM1.54 to a high of RM1.72 recently, share prices retraced back to end at RM1.64 last Friday. As long as key supports at RM1.54-1.58 hold, we opine that TOMYPAK is ripe to launch another wave of uptrend in the medium to long term. A decisive breakout above key resistances near RM1.69 (100-d SMA) and upper resistance of the downtrend channel at RM1.77 could take the next leg up towards RM1.88 (61.8% FR) territory. Cut loss at RM1.52 levels.

Source: Hong Leong Investment Bank Research - 28 Nov 2016