1H16 core earnings of RM27.8m came in within our (54%) but above consensus (62%) expectations. A 6.0 sen dividend was declared broadly within expectations. Maintain FY16- 17E of RM51.4-56.6m. However, we downgrade our call to MARKET PERFORM (from OP) as share price has done well (+34% YTD) as most upsides have been priced in, and maintain TP of RM4.49 with an unchanged Target PER of 14.6x on FY17E FD EPS of 30.8 sen.

1H16 core net profit (CNP*) of RM27.8m came in within our but above consensus expectations at 54% and 62%, respectively, as we believe consensus estimates may not have accounted for margins improvement. A 6.0 sen dividend was declared which we deem as broadly within expectations based on our FY16E NDPS of 14.6 sen as we expect a heftier pay-out in 2H16 based on historical trends as TGUAN tends to declare dividends mostly in 4Q whilst maintaining its 30% payout ratio, which is in line with our estimates.

Results Highlights. The Group’s stellar 1H16 topline (+9%) and EBIT (+177%) is a result of higher sales volume of its plastic products and higher export sales, resulting in better margins. This translated into higher CNP (+150%). QoQ, topline was unexciting, increasing by 2% mainly from the plastic products segment, while PBT margins were up by 1.2ppt on better cost management. However, core net profit declined by 31% after stripping out one-off items such as unrealised forex gains and disposal gains on fixed assets.

Outlook. We expect continued top line and bottomline growth to be driven by higher-margin products with the commissioning of the 33-layer nanotechnology stretch film line 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. TGUAN is consistently investing in R&D to improve sales and margins on existing products (i.e. stretch film) and revamp its customer base to target more MNCs. We are positive on its prospect as USD rates are close to our estimates, while we expect continued capacity expansion into highmargin production lines to sustain the Plastic segment’s margins going forward. Note that we make no changes to FY16-17E earnings of RM51.4-56.6m.

Downgrade to MARKET PERFORM (from OP) but leave TP unchanged at RM4.49. We downgrade our call to MARKET PERFORM (from OUTPERFORM) as share price has done well year-to-date (+34%) increasing by 40% since our upgrade during 1Q16 results review (dated 27th May 2016), while fundamentals are mostly intact with earnings upsides accounted for. As such we maintain our TP of RM4.49 with an unchanged Target PER of 14.6x on FY17E FD EPS of 30.8 sen. 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 - 26 Aug 2016