1H17 core earnings of RM28.6m came in well within our (48%) and consensus (45%) expectations. No dividends, as expected. Maintain FY17-18E earnings of RM60.0-68.2m. FY17 will see the commissioning of the 33-layer nano technology stretch film line, the 8th PVC food wrap line in 2H17, and a 5-layer blown film line, with earnings accreting mostly in FY18. Reiterate OUTPERFORM and TP of RM5.40 on FY18E FD EPS of 37.1 sen and an unchanged Target PER of 14.6x.

1H17 core net profit (CNP*) of RM28. 6m came in within our and consensus expectations at 48% and 45%, respectively. No dividends, as expected. We expect dividends to be paid out in 2H17, while historical trends suggest that TGUAN tends to declare the bulk of dividends in 4Q whilst maintaining a 30% pay-out ratio, which is in line with our estimates.

Results Highlights. YoY-Ytd, TGUAN?s top-line grew by 11% on the back of solid sales volume growth from its plastic segment (+12%), which mostly driven by export sales, as well as the F&B segment (+6%). PBT margins declined marginally (-1.0ppt) due to the F&B segment from lower tea sales which generally have better margins, leaving PBT flattish YoY, while NP declined on higher effective tax rates of 18.4% (vs. 15.0% in 1H16). However, CNP was up by 3% after adding back losses on forex of RM1.8m. QoQ, top-line increased by 3%, on better sales from both segments, but CNP was down 7% as PBT margins declined by 0.1ppt, and excluding unrealised forex loss of RM1.8m in 1Q17.

Outlook. Top and bottom line growth were driven by higher margin products with the commissioning of second 33-layer nano technology stretch film line, the 8th PVC food wrap line in 2H17, and plans for a 5- layer blown film line which we expect earnings 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 we 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.

Maintain OUTPERFORM and TP to RM5.40. We maintain our FY18E FD EPS of 37.1 sen on an unchanged Target PER of 14.6x. We like TGUAN for its consistent earnings, and plastic segment margin (c.8- 9%) since FY16, with most upsides from capacity expansion already factored into our estimates. We believe further earnings upside will come from the Group?s ability to boost margins from improved product mix, while its strong net cash position allows for further capacity expansion. Even on our conservative applied PER of 14.6x vs. other plastic packagers under our coverage of 17.6x to 20.5x, TGUAN warrants a OUTPERFORM call as its fundamentals are intact while upsides are attractive.

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 - 28 Aug 2017