9M18 CNP of RM26.8m came within our expectation at 70% of our full-year estimate. No dividend was declared, as expected. Moving forward, we expect the group to grow its capacity by c.5% p.a. in FY18-19E, but strong sales growth potential may be dampened by the ongoing trade war. Maintain FY18-19E earnings of RM38.2-39.4m Reiterate UNDERPERFORM call with TP of RM1.95 on an unchanged Target PER of 9.0x.

9M18 core net profit (CNP) of RM26.8m came within our expectation at 70%. No consensus was available. No dividends declared, as expected. We expect dividends to be paid out in the final quarter based on historical trends as TGUAN tends to declare the bulk of its dividends in 4th quarter.

Results highlight. YoY-Ytd, revenue increased by 3% contributed by both the plastic (+3%) and F&B (+6%) segments on increased export sales for its stretch film, industrial bags and PVC food wrap. However, 9M18 CNP was down 39% mainly due to PBT margin compression (- 3.1 ppt) on higher operating expenses from freight and staff cost, and operating losses recorded from its restaurant operations and organic noodle products. QoQ, revenue increased by 8% mainly led by its plastic segment as there was higher sales volume for its stretch films, garbage bags and PVC food wrap. Even though PBT margins improved marginally by 0.6 ppt due to lower operating losses from its F&B segment, CNP was only up by 1% on the back of higher effective tax rates (+0.9 ppt) and after excluding exceptional items.

Outlook. The on-going trade war between U.S. and China is a dampener on sales growth for TGUAN. Moving forward, TGUAN will continue to seek for new customers and markets for its product. The Group is also constantly investing in R&D to improve sales and margins on existing products (i.e. stretch film) and aims 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 earnings. Post results, we maintain our FY18-19E earnings at RM38.2-39.4m. Additionally, TGUAN announced the acquisition of 49% stake in Thong Guan Trading (Thailand) Company Limited for RM0.6m yesterday. The impact to the balance sheet is minimal as the acquisition can be fully funded by cash as TGUAN is in a net cash position with high cash reserves of RM146m, while we believe the impact to earnings may be insignificant in the near term due to the bite- size nature of this acquisition.

Maintain UNDERPERFORM with the unchanged TP of RM1.95. Our TP is based on an unchanged ascribed PER of 9.0x to our FY19E FD EPS of 21.4 sen. 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.-3ppt 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 15.5-18.0x PER (mean valuations) due to the peers’ better average margins (8% EBIT margins) and average CNP growth rate of 8% for FY19.

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 - 30 Nov 2018