• NTPM core net profit is projected to grow between 5-15% in FY23-25E with the improvement in business conditions
• Allocating an annual CAPEX of RM15m to improve production automation in order to keep up with growing demand locally and in the region
• We initiate coverage on NTPM with a HOLD rating and TP of RM0.41 pegged to 19x forward PE based on CY23E EPS

Focused on Improving Automation

After investing RM300m between FY19-22 to expand its production capacity by 400% and 60% to 50k MT and 110k MT in Vietnam and Penang facilities respectively, NTPM is looking to allocate an annual CAPEX of RM15m for FY23-25E to improve its production automation. This is expected to reduce its reliance on labour in a rising wage cost environment. As Statista estimated that the tissue and hygiene paper market is projected to grow at a CAGR of 5.7% between 2022-26, we believe NTPM is poised to capture the growing demand in Malaysia. Moreover, as South East Asia continues its urbanisation trend, this will fare well for NTPM’s overseas business.

Project Earnings Recovery With Improvement in Business Conditions

We project core net profit to increase between by 5-15% yoy in FY23-25E attributable to stable sales contributions from the Tissue Paper and Personal Care segments as total revenue is projected to increase by 5.0-5.4% over FY23-25E. Moreover, input costs like raw materials, packaging and freight charges are expected to soften moving forward. As business conditions improve with the recovery in labour shortage issue, costs of operations are expected to normalise, but partially offset by higher minimum wages and higher costs to employ foreign workers. Therefore, core net margin is expected to be flat in FY23E at 2.8% due to a high operating costs environment and heightened inflationary risk. The core net margin is expected to improve slightly in FY24-25E at 2.9-3.2% as business conditions improve.

Initiate Coverage With a HOLD Rating

We initiate coverage on NTPM with a HOLD rating and 12-month TP of RM0.41 pegged to 19x PE based on CY23E EPS which is in-line with its ten-year forward mean PE after excluding FY18-19 due to one-off events whereby share price was running behind fundamentals despite sharp drop in earnings during that period. With projected DPS of 1.6sen for FY23-25E, this implies a decent dividend yield of 3.8%. Upside/ downside risks to our call are; 1) increasing/decreasing purchasing power among consumers, 2) higher/lower cost environment, 3) absence/announcement of government support to ease cost of living and 4) strengthening/weakening of Ringgit to US$.

Source: Affin Hwang Research - 13 Sept 2022