1Q17 core earnings of RM14.8m came in well within our (25%) and consensus (23%) expectations. No dividends, as expected. Maintain FY17-18E earnings of RM60.0- 68.2m. Upgrade to OUTPERFORM (from MP) and TP to RM5.40 (from RM4.76) post rolling forward to FY18E FD EPS of 37.1 sen with an unchanged Target PER of 14.6x.

1Q17 core net profit (CNP*) of RM14.8m came in within our and consensus expectations at 25% and 23%, respectively. No dividends, as expected.

Results Highlights. YoY-Ytd, TGUAN?s top-line grew by 11% on the back of solid sales volume growth mostly from: (i) plastic segment from sales of stretch film, garbage bags and PVC food wrap products, and higher selling prices in tandem with higher material cost, and (ii) F&B segment from sales of coffee and curry powder products. PBT margins declined marginally (-0.3ppt) due to the F&B segment recording lower tea sales, which generally have better margins. All in, bottom-line declined by 10% due to higher effective tax rates of 19.6% (vs. 12.7% in 1Q16). QoQ, top-line increased by 2%, on better sales from both segments. However, CNP increased by 21% despite slightly weaker EBIT and PBT margins post accounting for unrealised forex loss of RM1.8m.

Outlook. We expect top and bottom line growths to be 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 and expect continued expansion into high-margin production lines to sustain the Plastic segment?s margins going forward. Note that we make no changes to FY17-18E earnings of RM60.0-68.2m.

Upgrade to OUTPERFORM (from MP) and increase TP to RM5.40 (from RM4.76). We upgrade our call to OUTPERFORM (from MP) as fundamentals are intact while upsides are attractive at the current level as share price has corrected by 8% since our last report (dated 28th Feb-17), likely on weaker market sentiment. Additionally, we roll forward our valuations to FY18E FD EPS of 37.1 sen (from 32.6 sen in FY17E) on an unchanged Target PER of 14.6x, upgrading our TP to RM5.40 (from RM4.76). All in, TGUAN is providing attractive total returns of 26% at current levels.

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 - 31 May 2017