· Reaping the benefits of new expansion. NTPM is targeting new markets in Vietnam, Thailand, and Indonesia after its recent Vietnam plant expansion. Currently, the new Vietnam plant is operating at about 15% of its 30tpd (tonnes per day) capacity, and is targeted to achieve 50% utilisation by end-FY16. The company is also expanding their new market into diapers and cotton rolls as new machines come online. We gather that the existing diapers line in Malaysia is already profitable and running at 40% capacity, and is targeted to achieve 50% by end-FY15. We expect the Indochina market and diaper businesses to contribute to FY16-17E revenue growth of 10-8% to RM604-RM651m.

· Cost saving initiatives to enhance margins. We gather that the company recently lowered marketing cost by reducing the numbers of promoters, resulting in c.RM3m annual savings. They have also initiated cost-saving automation projects, which resulted in substantial reduction of head-count and c.RM2m in cost savings. We believe the results of management’s cost-saving initiatives can be seen in the recent 1Q16 where YoY PBT margin jumped from 7.4% to 12.4%. Thus, we expect the move to result in PBT margin recovery from 10.8% in FY15 to 11.8-12.7% in FY16-17E.

· Solid set of 1Q results. NTPM’s recently released 1Q16 results show that the expansion and cost-saving moves are already being felt. Core Net Profit (CNP) doubled to RM14.7m YoY as Paper segment PBT improved 47% to RM13.6m on cost-savings, while the Personal Care segment PBT rose 6.6x to RM4.2m on sales volume growth which led to better economies of scale. QoQ, despite the strong pre-GST demand in 4Q15, 1Q16 CNP rose slightly to RM14.7m (+2%) as Personal Care segment PBT continued to rise (+6%) on higher volume sales.

· Stocking up for future growth. We understand that NTPM is now holding about 9 months’ supply of pulp at an average cost of USD600/MT, purchased at an average rate of USDMYR of 3.30. Going forward, we gather the company will use 80% of its existing pulp stock and purchase 20% of new pulp which could save NTPM about RM300m per annum in pulp cost. We believe management’s move to secure pulp stocks is prudent as this limits raw material costs increase from the weak ringgit in the mid-term.

· Exploring new business area. We gather that NTPM is considering utilising its recycling byproduct, called sludge, to be transformed into paper files for stationery usage. Currently, the sludge is sold cheaply to an external party. Assuming about 35m files per year are produced at a margin of RM0.15 per piece, we think this project could contribute c.RM5.3m a year or 10% to NP. Note that we have not imputed the new product line into our estimations as the project is currently in its early stages.

· But possible downer on dividends. Though NTPM has consistently paid out a 3-year average of 60% of earnings, we gather that management intends to pare down RM70-80m of its debt, hence halving FY16E net gearing from 0.4x to 0.2x and reducing interest expense by RM2m. Given the cashflow requirement for paring down debt, the company has determined that they are unlikely to pay dividends in FY16. However, we expect dividends to resume in FY17. Assuming a payout ratio of 60% we estimate DPS of 3.0 sen/share, translating to a decent FY17 dividend yield of 3.9%.

· NOT RATED at Fair Value of RM0.81, but a compelling long-term buy. Our Fair Value at RM0.81 offers a decent upside of 6.7%, with a Target PER of 15.3x on CY16E EPS of 5.3 sen. Our Target PER is based on a 10% discount to the KL Consumer Index (KLCSU) FY16E Fwd. PER of 17.0x. Although NTPM’s market cap. at RM854m is close to average KLCSU market cap of RM981m, we think a 10% discount for NTPM is fair given its lower CY16E dividend yield of 2.7% against KLCSU’s 4.4%. While the lack of FY16 dividend may be tough to swallow for short-term investors, NTPM’s long-term bright earnings growth prospect supported by high market share and stable nature of its business should appeal to investors with longer horizon. Indeed, applying our Target PER of 15.3x to CY17E EPS of 5.7 sen translates to a forward FV of 0.87, implying an attractive total return of 19.9% (15.1% upside, 4.8% CY17E Dividend Yield). We may relook at our valuations and call after the no dividend payout period of FY16.

Source: Kenanga Research - 17 Sep 2015