FY16 core earnings of RM53.6m came in within our (104%) and consensus (98%) expectations. A 6.0 sen dividend was declared, which was below expectations (82%). Increase FY17E earnings by 3.6% and introduce FY18E NP of RM68.2m. Maintain MARKET PERFORM as upsides have been accounted for, but upgrade TP to RM4.76 based on a higher FY17E FD EPS of 32.6 sen and Target PER of 14.6x.

FY16 core net profit (CNP*) of RM53.6m came in within our and consensus expectations at 104% and 98%, respectively. A final dividend of 6.0 sen was announced bringing cumulative FY16 DPS of 12.0 sen, which was below our expectations at 82% as we had assumed a 30% pay-out ratio as TGUAN does not have a formal dividend policy.

Results Highlights. YoY-Ytd, TGUAN saw impressive bottom-line growth of 55%, on the back of modest top-line growth (+5%) but driven mostly by better product margins as PBT margin jumped to 9.3% (from 6.1%). Margin improvements were driven by export sales of plastic products namely premium stretch films, PVC food wrap and garbage bags. QoQ, top-line only increased by 4% on the back of growth from the plastic segment on higher sales volume, while higher financing cost (+173%), and higher effective tax rates in 4Q16 caused CNP to decline by 10%.

Outlook. We expect sustained top and bottom line growths driven by higher margin products with the commissioning of second 33-layer nanotechnology stretch film line, the 8th PVC food wrap line in 2H17, and plans for a 5 layer blown film line which we expect to accrete mostly in FY18. 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, while we expect continued expansion into high-margin production lines to sustain the Plastic segment?s margins going forward.

Increasing FY17E earnings by 3.6%. We increase FY17E by 3.6% to RM60.0m to account for at least one quarter of earnings contributions from the new machinery and introduce FY18E NP of RM68.2m. Additionally, we lowered our dividend pay-out ratio assumptions to 25% (from 30%), closer to FY16 levels with FY17- 18E dividend yields of 2.9-3.3%.

Maintain MARKET PERFORM but increase TP to RM4.76 (from RM4.60). We maintain our MARKET PERFORM call as fundamentals are intact while downsides are limited due to the export-driven play and weak Ringgit environment. We upgrade our TP based on a higher FY17E FD EPS of 32.6 sen (from 31.5 sen) post earnings upgrade, and an unchanged Target PER of 14.6x.

Risks 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 - 28 Feb 2017