9M17 core earnings of RM44.2m came in well within our expectation (74%). 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 RM5.67 on FY18E FD EPS of 37.1 sen with an unchanged Target PER of 15.3x.

9M17 core net profit (CNP*) of RM44.2m came in within our expectation at 74%. No consensus available. No dividend, as expected. We believe dividends will be paid out in 4Q in line with past trends, whereby the bulk of dividends are back loaded to 2H. As such, we maintain our 30% payout ratio, which is in line with historical estimates.

Results Highlights. YoY-Ytd, TGUAN’s top-line grew by 13% driven by growth from its plastic segment (+13%) as well as the F&B segment (+10%). PBT was flattish with PBT margins declining marginally (- 1.1ppt) due to; (i) the F&B segment from lower tea sales which generally have better margins and operating losses from the restaurant operations, (ii) plastic segment likely on higher material cost and (iii) higher financing cost (+46%), resulting in NP declining on higher effective tax rates of 16.7% (vs. 12.8% in 9M16). However, CNP increased by 6% after accounting for forex losses of RM2.6m. QoQ, top-line increased by 6% on improved sales from both segments but CNP jumped by 13% on; (i) lower financing cost (-10%), (ii) lower effective tax rates of 13.4% (vs. 17.3% in 2Q17) and (iii) post accounting for RM0.9m forex losses.

Outlook. Top and bottom line growths were driven by higher margin products with the commissioning of a second 33-layer nano technology stretch film line, the 8th PVC food wrap line which was completed in 3Q17, 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 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 CNP of RM60.0-68.2m.

Maintain OUTPERFORM and TP to RM5.67. We maintain our FY18E FD EPS of 37.1 sen on an unchanged Target PER of 15.3x. We like TGUAN’s consistent earnings, and plastic manufacturing margins (c.8- 9% since FY16), while our earnings estimates reflect the impact of the capacity expansion. 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 15.3x vs. other plastic packagers under our coverage of 17.4x to 19.6x, TGUAN warrants an OUTPERFORM call as its fundamentals are intact while upsides are attractive.

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 - 24 Nov 2017