1H19 CNP of RM26.1m came within our expectation at 53%. No dividend was declared which is expected to be paid in 2H19. The Group highlights that trade tensions may dampen sales in the future and will continue to seek new customers and markets. Maintain FY19-20E CNP of RM48.9- 50.2m. Reiterate MP but increase TP to RM2.45 post rolling forward to FY20E.

Within expectation. 1H19 Core Net Profit (CNP) of RM26.1m came within our estimate at 53%. Consensus was not available as the company is not widely tracked. No dividend, as we expect dividends to be paid out in 2H19 based on historical trends. Note that TGUAN tends to declare the bulk of its dividend in 4Q.

Results’ highlight. YoY-Ytd, 1H19 top-line increased by 6% on better export sales from stretch film. Meanwhile EBIT margin also improved by 2.2ppt on better product mix due to better margin from premium films. All in, bottom-line increased by 43% despite marginally higher effective tax rate of 15.5% (vs. 13.9%). QoQ, top-line was similarly up by 6% on increased sales of stretch film. However, CNP declined by 14% on the back of lower EBIT margin (-0.4ppt) and on slightly higher financing cost (+12%).

Outlook. The on-going trade war between the US and China is likely to affect global trade and may dampen the sales growth for TGUAN. Moving forward, TGUAN will continue to seek 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.

Maintain FY19-20E CNP of RM48.9-50.2m. At current levels, FY19-20 dividends of 8.6-8.8 sen imply 3.6-3.6% yields based on a 24% payout ratio in line with historical trends.

Maintain MARKET PERFORM but increase Target Price to RM2.45 (from RM2.40). Our TP is increased post rolling forward our valuations to FY20E FD EPS of 27.2 sen (from 26.6 sen) based on an unchanged ascribed PER of 9.0x (-1.0SD). The valuations remain below profitable plastic packaging peers under our coverage (from average to -1.0SD for PER valuation) due to the peers’ better margins (15% 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 - 29 Aug 2019