9M16 core earnings ofRM41.4m came in within our (80%)and consensus (78%) expectations. No dividend was declared, as expected. Maintain FY16-17E of RM51.4-56.6m. Upgrade to OUTPERFORM but maintain TP of RM4.49 on attractive total returns of 12.4% as we believe the stock will fare well in the near term in light of a weaker Ringgit as it is export driven, and on the back of YoY margin improvements from technological advances and higher margin products.

9M16 core net profit (CNP*) of RM41.4m came in within our and consensus expectations at 80% and 78%, respectively. No dividend was declared, as expected. To date, TGUAN has declared a 6.0sen dividend in 2Q16, while we expect a heftier pay-out in 4Q16 based on historical trend as TGUAN tends to declare dividends mostly in 4Q whilst maintaining its 30% pay-out ratio, which is in line with our estimates.

Results Highlights. YoY-Ytd, TGUAN saw impressive topline (+7%) and EBIT (+105%) improvements mainly from higher sales volume of its plastic products segment and higher export sales for its garbage bags, stretch films and Purewrap, resulting in better margins, while the F&B segment also saw improvements from higher demand for tea and curry powder products. This translated to higher CNP (+110%). QoQ, CNP increased by 19% on the back of mild topline growth from the plastic segment due to the abovementioned reasons, and on the back of lower effective tax rates, likely from tax incentives, which were not recognised in 2Q16 and carried forward to 3Q16.

Outlook. We expect sustained top and bottomline growths driven by higher margin products with the commissioning of the 33-layer nanotechnology stretch film line in 1Q16, 5-layer blown film line in 2Q16, new Purewrap lines targeted in 4Q16, and a second 33-layer nanotechnology stretch film line in 2Q17, which we have accounted for. TGUAN is consistently investing in R&D to improve sales and margins on existing products (i.e. stretch film) and continues to revamp its customer base to target more MNCs. We are positive on TGUAN’s prospects, evident from improvements in sales volumes in both segments, while we expect continued expansions into high-margin 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.

Upgrade to OUTPERFORM but maintainTP of RM4.49. We upgrade our call to OUTPERFORM (from MARKET PERFORM) as TGUAN is currently commanding attractive total returns of 12.4% at current levels. We believe the stock will fare well in coming quarters in light of a weaker Ringgit, which should bode well for sales and earnings in the near-term as it is an export driven play, while downsides are limited. This is on the back of YoY net margin improvements (c.9% vs. 4% in FY15) from technological advancements for stretch film and increased sales for higher margin products (i.e. Purewrap). We maintain our TP of RM4.49 with an unchanged Target PER of 14.6x on FY17E FD EPS of 30.8sen. Risk to our call include; (i) volatile plastic resin prices, (ii) foreign currencies risk, (iii) lower-than-expected contribution from its Chinabased subsidiaries, and (iv) lower than expected margin.

Source: Kenanga Research - 25 Nov 2016