FY18 CNP of RM48.5m is above our expectation at 127% mainly from better margins likely from improved product sales mix. A final dividend of 8.0 sen declared also came above our expectation. Upgrade FY19E CNP by 24% as we believe the group will seek higher margin products while we also introduce FY20E earnings of RM50.2m. Upgrade to MARKET PERFORM with higher TP of RM2.40 on an unchanged target PER of 9.0x.

Above expectation. FY18 core net profit (CNP) of RM48.5m came above our estimate at 127%. Top-line came in line at 103% but the positive deviation stemmed mainly from better margins, likely attributable to an improved product sales mix. No consensus was available. A final dividend of 8.0 sen was declared for FY18, which is above our expectation at 112% due to the stronger-than-expected earnings and higher payout of 24% (vs. our assumption of a 20% pay- out).

Results highlight. YoY-Ytd, FY18 CNP increased by 13%, mainly from: (i) stronger top-line (+4%) on increased export sales for its stretch film, industrial bags and PVC food wrap, and (ii) better operating margin (+0.3ppt) likely from higher portion of sales of plastic product such as stretch film and PVC food wrap, which generally yield higher margin. QoQ, despite revenue declining marginally by 1%, 4Q18 CNP surged 140% mainly attributed to improvement in its operating margin (+4.0 ppt) coming from the strengthening of USD dollar in 4Q18 (c.+2%), which led to better selling price when converted to MYR.

Outlook. 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.

Increase FY19E CNP by 24% to RM48.9m and introduce FY20E CNP of RM50.2m. In view of the stronger earnings and better CNP margins shown in FY18, we increase our FY19E CNP by 24% after increasing our CNP margin assumption to 5.5% (from 4.5% previously). We believe management is likely to seek for more sales from higher margin products such as stretch film and PVC food wrap. We also introduce our FY20E CNP of RM50.2m, on the back of CNP margin of 5.5%

Upgrade to MARKET PERFORM with higher TP of RM2.40 (from RM1.95) post increasing our earnings for FY19E. Our TP is based on an unchanged ascribed PER of 9.0x (-1.0SD) to our increased FY19E FD EPS of 26.6 sen (from 21.4 sen). We upgrade our call to MARKET PERFORM (from UP) given the improvement in TGUAN’s margins in 4Q18. However, our valuations remain on the lower end vs. comparable plastic packager peers under our coverage of 18.0x PER (mean valuations) due to the other peers’ abilities to garner even better margins (average c.11% EBIT margins). Nonetheless, we may look to lifting up our valuations should we see better earnings and margin consistency.

Risks to our call include: (i) volatile plastic resin prices, (ii) foreign currencies fluctuations, and (ii) higher/lower-than-expected margin.

Source: Kenanga Research - 28 Feb 2019