Period  3Q14/9M14

Actual vs. Expectations TGUAN recorded 3Q14 net profit of RM4.9m, bringing 9M14 net profit to RM21.7m which is below expectations, making up 63.1% of our full-year FY14 forecasts and 63.8% that of market consensus’.

 The variance from our forecasts is due to higher cost environment in its China-based subsidiaries that affected profit margins for the plastics division.

Dividends  No dividends were declared for the quarter, as expected.

Key Results Highlights Net profit contracted 39% QoQ to RM4.9m in 3Q14 compared to RM8.0m in 2Q14, while revenue dipped slightly by 2% QoQ. The drop in net profit was attributed to lower contributions from its China and Sabah-based subsidiaries on higher operating cost. Additionally, the 3.9% import duty incurred in exports to Japan from China also impacted the sales order.

 Net profit plunged by 56% YoY, despite revenue rising by 2%. The substantial drop in net profit was mainly due to: (i) lower contributions from its China and Sabah-based subsidiaries as mentioned above and (ii) lower margin from both plastic and F&B division (Group PBT margin of 2.3% in 3Q14 versus 7.2% in 3Q13).

 For 9M14, net profit dropped slightly by 1% YoY to RM21.7m, while revenue rose by 6% YoY to RM565.6m. The contraction in earnings was mainly due to: (i) lower contributions from its China-based subsidiaries as stated above and (ii) lower margin from plastic division (PBT margin of 4.1% in 9M14 versus 5.1% in 9M13).

Outlook  The recent drop in crude oil price has slowed down the order for plastic products as customers are anticipating lower products prices due to the lower raw materials prices. However, we believe that the sales order will pick up in the near term as resin prices are fairly stable compared to crude oil prices (LLDPE -2.5% QoQ; LDPE -1.6% QoQ vs. Brent -12.33% QoQ).

 TGUAN is targeting to add another two new Purewrap production lines in 1Q15, which will increase its current Purewrap capacity to 12,000MT p.a. Hence, we expect higher 2015 earnings contribution from the expansion.

Changes To Forecasts

 We are trimming our FY14E earnings forecasts by 11.3% to RM30.5m after reducing our PBT margin assumption to 4.5% from 5.0%. However, we maintain our FY15E forecasts as we remain positive on its long term outlook driven mainly by capacity expansion.

Rating Maintain OUTPERFORM

Valuation  TP is maintained at RM3.70. Our valuation methodology is based on a targeted PER of 10.0x on FY15E basic EPS of 37.0 sen (note that conversion of ICULS will only take place after two years, hence, there is no immediate dilution in the short-term).

 Our targeted PER of 10x is based on 14% discount to current FBM Small Cap Fwd. PER valuation of 11.4x and only 30% discount to its closest peer SCIENTEX with ascribed PER of 13.0x for its manufacturing segment. The 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