1Q19 CNP of RM14.1m came within our expectation at 29%. Not widely tracked, consensus is not available. No dividend was declared with dividends expected to be paid in 2H19. Moving forward, the on-going trade tension is seen dampening sales, but we believe TGUAN will continue to seek for new customers and markets. Maintain FY19-20E CNP of RM48.9-50.2m. Reiterate MP with an unchanged TP of RM2.40 on the unchanged target PER of 9.0x.

Within expectation. 1Q19 Core Net Profit (CNP) of RM14.1m came within our estimate at 29%. Consensus was not available. No dividend was declared, as expected. We expect dividends to be paid out in 2H19 based on historical trends as TGUAN tends to declare bulk of its dividend in 4Q. We maintain our 24% pay-out ratio, which is similar with the historical trend.

Results’ highlight. YoY-Ytd, 1Q19 CNP increased by 55%, mainly attributable to better operating margin (+2.7ppt) coming from the strengthening of USD dollar (c.+4%) , which led to higher selling prices of its plastic products when converted to MYR. QoQ, 1Q19 CNP declined by 22%, mainly due to: (i) stronger USD in 4Q18 (+2%) that saw its product selling at higher price, and (ii) higher effective tax rate (+0.5 ppt) in 1Q19. Although the food, beverages and other consumable products division contributes only c.7% to group revenue, we note that this is the first quarter where it recorded gains due to increase in sales from tea products after six consecutive quarters of losses.

Outlook. The on-going trade tension between the two largest economies is likely to affect global trade and may dampen the sales growth for TGUAN. Moving forward, TGUAN will continue to seek for new customers and markets for its products. The Group is also constantly investing in R&D to improve sales and margins for 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.

No changes to estimates. No changes to our FY19-20E CNP of RM48.9-50.2m.

Maintain MARKET PERFORM with unchanged Target Price of RM2.40. Our TP is based on an unchanged ascribed PER of 9.0x (- 1.0SD) to our FY19E FD EPS of 26.6 sen. Our valuations remain on the lower-end vs. comparable plastic packager peers under our coverage (from average to -1.0SD for PER valuation) due to the peers’ better margins (average c.11% EBIT margins). Nonetheless, we may look to lift 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 - 30 May 2019