1Q16 core earnings of RM16.4m came in above both our (51%) and consensus (40%) expectations on stronger-than-expected plastic and F&B segment’s margin. No dividend as expected. We increase our FY16-17E earnings by 28-26% to RM41.3-45.5m (from RM32.3-36.1m) to account for the margin expansions. Upgrade TP to RM4.19 (from RM3.33) and maintain our OUTPERFORM call with an unchanged Target PER of 11.0x and a higher FY17E Fwd. EPS of 38.2sen (from 30.4 sen).

1Q16 core net profit (CNP*) of RM16.4m came in above both our and consensus expectations at 51% and 40%, respectively on stronger-thanexpected Plastic segment and F&B segment’s margins as our previous assumptions may have been too conservative, while this was also on the back of a stronger USD in 1Q16 (average USD1:RM4.20) vs. our FY16-17E (USD1:RM4.10).

Results Highlights. The Group’s stellar results (+12% YoY) are attributable to higher sales volume of its plastic products and higher export sales, resulting in better margin. As a result, EBIT margin increased by +6.4ppt, also aided by lower ‘other expenses’ (-43.9%). However, topline declined QoQ (-8%) due to lower contribution from the plastic segment, likely due to a strengthening Ringgit in 1Q16 vs. 4Q15, while plastic product margin declined slightly (-1.4ppt). However, the F&B segment saw improved margins on coffee and tea products.

Outlook. We expect continued top and bottomline growths driven by capacity expansion into higher margin products such as the 33-layer nanotechnology stretch flim line, commissioned in 1Q16; 5-layer blown film line, commissioning in 2Q16, and new Purewrap lines targeted in 2H16, with an estimated capacity of 1.4k MT per line annually. We are positive on TGUAN’s prospect as USD rates are close to our target of RM4.10 in FY16- 17E, and continued capacity expansion into high-margin production lines should sustain the Plastic segment’s margin going forward.

We increase our FY16-17E earnings by 28-26% to RM41.3-45.5m (from RM32.3-36.1m) on stronger margins assumptions on lower administrative and distribution expenses, and lower cost of goods sold. We believe our estimates are still conservative and may look to raise earnings further pending further details from management.

We upgrade our TP to RM4.19 and maintain our OUTPERFORM call. We upgrade our TP of RM4.19 (from RM3.33) on unchanged Target PER of 11.0x and a higher FY17E on Fwd. EPS of 38.2 sen (from 30.4 sen). Our Target PER is based on a 30% discount to Consumer Packaging sector’s PER due to TGUAN’s net margin of 5.4% vs. consumer packager peer SLP’s 15.4%. Risk to our call include; (i) Volatile plastic resin prices, (ii) foreign currencies risk (iii) lower-than-expected contribution from its China-based subsidiaries, and (iv) lower than expected margin.

Source: Kenanga Research - 27 May 2016