We initiate coverage on TOMYPAK with an MARKET PERFORM rating and fully diluted TP of RM1.00. With new key management since FY14, turnaround efforts have proven successful in FY15-16 with improved margins while growth going forward is driven by their bullish capacity expansion plans (+89% from FY17-21). Backed by reputable clients ensuring resilient demand as well as lower taxation on RA benefits, we expect decent FY17-18E CNP growth of 25-24%. All in, we believe TOMYPAK is fairly valued based on Fwd. PER 19.2x on FY18E FD EPS of 5.3 sen.

The second largest flexible food packaging converter in Malaysia. TOMYPAK is the second largest converter for flexible food packaging in Malaysia, servicing reputable clientele such as Nestle, Ajinomoto, etc., with local and international exposure. As a consumer products packager, TOMYPAK’s production lines focus more on downstream processes, making it a direct comparable to DAIBOCI, while SLP and SCGM are more focused on upstream production (i.e. extrusion).

Savvy management team taking the company to greater heights. TOMYPAK commenced its turnaround in 2014 with the appointment of new management, namely; (i) Lim Hun Swee as the Group’s new Managing Director (MD), and (ii) Tan See Yin, Executive Director. With turnaround efforts to reduce wastage and investment into advanced metalising machine, EBIT margins improved to 14.8-11.2% in FY15-16 (from 5.8% in FY14).

Stable growth prospects mainly driven by capacity expansion plans as TOMYPAK has plans to increase capacity by 89% up to 36,000MT p.a. by FY20-21 (from 19,000MT p.a. currently) by constructing a new plant in Senai. Phase 1 of the capacity expansion will come on stream from 2H17 to 1H18, while Phase 2 and 3 will see capacity growing gradually from FY19 up till FY20-21. As such, we expect revenue to grow by 11-23% in FY17-18E, while historical revenue growth has been rather flattish at 2.4% to -1.5% in FY15-16.

Earnings growth of 25-24% in FY17-18E, third highest among peers. TOMYPAK’s 2-year forward average earnings (24%) is the third highest among its peers, and higher than its direct competitor, DAIBOCI (21%). FY17 is poised to be a turnaround year mainly driven by the group’s bullish capacity expansion plans, and backed by stable EBIT margins (12-12% in FY17-18E), lower effective tax rates (12-13% in FY17-18E, vs. 21% in FY16A) from Reinvestment Tax Allowance (RA), and riding off a weaker FY16 due to higher operating cost and the absence of the RA.

Initiating coverage with a MARKET PERFORM call and fully diluted TP of RM1.00 based on a Fwd. PER 19.2x applied to FY18E FD EPS of 5.3 sen. We applied a Fwd. PER of 19.2x is based on a slight premium to its direct comparable, DAIBOCI, which is trading at 18.2x 5-year average Fwd PER as TOMYPAK has better core net margins, earnings growth, slightly better dividend yields, and lower net gearing of 0.06x. However, this target PER is slightly below SLP (21.5x Fwd. PER) and SCGM (19.9x Fwd. PER) as they are faring better than TOMYPAK in terms of margins, earnings growth and ROEs. We like TOMYPAK for its (i) reputable client base, (ii) resilient demand in the F&B industry, (iii) bullish expansion plans of 89% up to FY20-21, (iv) effective turnaround and management since FY14 and (v) beneficiary of a strengthening USD. However, based on our fully diluted Target Price of RM1.00, we believe TOMYPAK is fairly valued with 4.1% total returns at current levels, warranting a MARKET PERFORM call.

Source: Kenanga Research - 9 Jun 2017