FY17 core earnings of RM48.1m came in below our expectation (80%) on higher-than-expected cost. Final dividend of 8.0 sen is also below our expectation (67%). Lower FY18E CNP by 20% to RM53.4m on margin compressions, and introduce FY19E CNP of RM56.9m. Maintain OUTPERFORM on a lower TP of RM4.05 (from RM5.55) based on a lower FY18E FD EPS of 29.0 sen and lower Target PER of 14.0x.

FY17 core net profit (CNP) of RM48.1m came in below our expectation at 80%. Top-line was well within our expectations at 99%, but bottom-line missed due to higher cost this quarter attributable to freight, sales and promotional expenses, staff cost and operating losses from its F&B segment, dragging 4Q17 CNP margins to 1.8% (from 7.2% in 3Q17). No consensus available. A final dividend of 8.0 sen was announced for FY17, which is below our expectation at 67%, while we assumed a 25% pay-out ratio vs. actual pay-out of 18% of net profit. Note that TGUAN does not have a formal dividend policy.

Results Highlights. YoY-Ytd, TGUAN’s top-line grew by 11% driven by growth from its plastic segment (+11%) as well as the F&B segment (+13%). However, EBIT margin declined by 3.1ppt on higher cost from freight, sales and promotional expenses, staff cost and operating losses from its F&B segment which dragged down CNP to 11%. QoQ, top-line declined by 3% on lower sales volume from its China operations. However, EBIT margins declined by 95% on higher cost, similar to reasons mentioned above. All in, CNP declined by 76% on higher financing cost (+48%).

Outlook. TGUAN has plans for a 5-layer blown film line which we expect earnings to accrete mostly in FY18, while we are estimating capacity to grow by 5% in FY19. 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. The Group is focussing on continued expansion into high-margin production lines to sustain the plastic segment’s margins going forward.

We lower FY18E CNP by 20% to RM53.4m and introduce FY19E CNP of RM56.9m. In light of the higher cost this quarter, we are lowering FY18E CNP margins to 6.2% (from 7.1%) as we are more conservative going forward, and seek further clarification from management on the cost outlook over FY18-19. We introduce FY19E CNP of RM56.9m, on 6.4% CNP margins. Additionally, we lower our dividend pay-out estimates to 20% (from 25%), implying FY18-19E NDPS of 10.0-10.6 sen (2.8-2.9% yield).

Maintain OUTPERFORM, but on a lower TP of RM4.05 (from RM5.55). We lower our FY18E FD EPS to 29.0 sen (from 32.6 sen) on a lower Target PER of 14.0x (from 15.3x). Even post trimming our earnings significantly and on the lowest applied PER among plastic packagers under our coverage (17.4-19.2x applied PER), TGUAN still warrants an OUTPERFORM call. We like TGUAN for its undemanding valuations, and we believe we have priced in most foreseeable downside risks for now. Going forward, management is still focussed on improving margins and we are of the view that margins will soon revert to normalised levels, while its strong net cash position allows for further capacity expansion.

Source: Kenanga Research - 28 Feb 2018