Period  2Q14/1H14

Actual vs. Expectations TGUAN recorded 2Q14 net profit of RM8.0m, bringing 1H14 net profit to RM16.7m which was within both our and consensus expectations, making up 48.5% and 49.1% of full year forecasts of RM34.4m and RM.34.0m, respectively.

Dividends  Interim dividend of 3 sen was announced. This caught us by surprise as historically TGUAN only declared first and final dividend in fourth quarter.

 Nevertheless, we deem it within our expectation. We expect NDPS of 5.8 sen to be announced in 2H14 and keep our FY14E NDPS of 9.8 sen, implying dividend payout ratio of 30.0% (in-line with historical dividend payout ratio).

Key Results Highlights Net profit contracted 8% QoQ to RM8.0m in 2Q14 compared to RM8.7m in 1Q14, despite revenue increasing by 10% QoQ. The increase in revenue was mainly due to: (i) increase in export volume and (ii) higher selling price of the plastics products, while the drop in net profit was caused by lower contributions from its China-based subsidiaries.

 Net profit surged by 51% YoY, backed by 10% YoY jump in revenue. The rise in net profit is mainly due to: (i) higher profit contribution from stretch film and PVC food wrap division and (ii) higher margin from F&B division (PBT margin of 3.4% in 2Q14 versus 9.2% in 2Q13).

 For 1H14, net profit hopped 55% YoY to RM16.7, while revenue increased by 8% YoY mainly due to: (i) better contribution and margin from plastics products (PBT margin of 4.8% in 1H14 versus 3.9% in 1H13) and (ii) higher margin from F&B division (PBT margin of 8.6% in 1H14 versus 5.5% in 1H13).

Outlook  TGUAN is targeting to add another two new Purewrap production lines in August 2014 and another two in 1Q15, which will double its current Purewrap capacity to 12,000MT p.a. Hence, we expect higher 2H14 earnings contribution from the expansion.

 TGUAN is spending a CAPEX of RM4.0m to set up a Newton Research & Development (R&D) Center for its stretch film segment. We reckon that this new effort could enhance production efficiency leading to margin improvement going forward.

 TGUAN proposed a 1-for-2 5-year 5.0% ICULS with 2 ICULSfor-1 free warrants in May. The fund raising exercise is expected to be completed in 4Q14 with proceeds of up to RM52.6m for its expansion plan.

Changes To Forecasts No changes to our FY14-FY15 forecasts as result are within expectations.

Rating Maintain OUTPERFORM

Valuation  TP is maintained at RM3.70. Our valuation methodology is based on a targeted PER of 10.0x on FY15E EPS of 37.0 sen.

 Our targeted PER of 10x is based on 5% discount to current FBM Small Cap Fwd. PER valuation of 10.5x and only 2% discount to its closest peer SCIENTEX with ascribed PER of 10.2x for its manufacturing segment. The small discount is applied due to its relatively smaller market cap and liquidity issue.

Risks to our Call (i) volatility of plastic resins prices

 (ii) foreign currency risk

Source: Kenanga