1H18 core earnings of RM18.1m came in within our expectation. No dividend, as expected. Moving forward, TGUAN is expecting to commission an additional stretch film production line in 4Q18 which we had already accounted for. Maintain FY18-19E earnings of RM38-39m Reiterate UNDERPERFORM with an increased TP of RM1.95 post rolling forward to FY19E FD EPS of 21.4 sen on an unchanged Target PER of 9.0x.

1H18 core net profit (CNP) of RM18.1m came within our expectation at 47%. No consensus available. No dividends declared, as expected. We expect dividends to be paid out in 2H18 based on historical trends as TGUAN tends to declare the bulk of its dividends in 4Q. We maintain our 25% pay-out ratio, which is slightly below historical trends of c.30%.

Results highlight. YoY-Ytd, top-line was up by 4% contributed by both the plastic (+4%) and F&B (+7%) segments on increased export sales for stretch film, industrial bags, PVC food wrap and beverage division. However, CNP was down 37% mainly due to PBT margin compression (-3.5 ppt) on higher operating expenses from freight and staff cost, and losses recorded from its restaurant and organic noodle product. QoQ, revenue declined 4% as the plastic segment saw a decrease in sales volume for its stretch films, industrial bags and PVC food wrap, while PBT margins improved marginally by 1.5 ppt riding on better margins from stretch film products. All in, bottom-line climbed 13% despite higher effective tax rate of 16% (vs. 11%).

Outlook. TGUAN has completed the commissioning of additional PVC food wrap lines in 2Q18 and is expected to commission an additional stretch film production line in 4Q18; both of which we expect earnings to accrete over FY18-19 while we expect capacity to grow by 5% in FY19. Moving forward, 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 focusing on continued expansion into high-margin production lines to sustain the plastic segment’s margins going forward.

Maintain UNDERPERFORM with an increased TP of RM1.95 (from RM1.85). Our TP is increased post rolling forward to FY19E FD EPS of 21.4 sen (from 20.8 sen) on an unchanged PER of 9.0x. Our applied PER is pegged at -1.0SD to its 4-year average. We are comfortable with our UNDERPERFORM call and below average valuations given recent volatility in earnings as observed in previous quarters caused by margin compressions (c.-4ppt YoY). However, we may look to upgrade earnings and valuations upon more formidable signs of margin improvements. We are more conservative with TGUAN’s applied PER vs. comparable plastic packager peers under our coverage of 14.0- 18.0x PER (mean valuations) due to the peers’ better margins (7-16% EBIT margins) and average CNP growth rate of 8-12% for FY18-19.

Risks to our call include; (i) volatile plastic resin prices, (ii) foreign currencies fluctuations, (iii) higher-than-expected contribution from its China-based subsidiaries, and (iv) higher-than-expected margin.

Source: Kenanga Research - 29 Aug 2018