FY19 CNP of RM61.4m is spot on our expectation while dividend of 9.0 sen came within estimate. The Group cautioned that the challenging global outlook may weigh on demand but is actively seeking new customers and markets. Maintain FY20E CNP and introduce FY21E CNP of RM65.0m. Downgrade to MARKET PERFORM (from OP) on an unchanged TP of RM4.10.

Spot on. FY19 Core Net Profit (CNP) of RM61.4m came in spot on our expectation. No consensus was available as the stock is not widely tracked. FY19 dividend of 9.0 sen is well within expectation at 97% of our estimate of 9.3 sen.

Results’ highlight. YoY, FY19 top-line increased by 9% on strong export sales from its stretch film and courier bags. Meanwhile, EBIT margins also improved on better product mix (+1.8ppt), which resulted in bottom-line increasing by 27%. QoQ, top-line declined by 10% due to weakness in the plastic segment caused by decrease in the sales volume of plastic products including stretch film and garbage bags as orders slowed in December 2019. However, CNP was up by 2% on: (i) marginally better EBIT margins (+0.2ppt), and (ii) lower effective tax rate of 14% (vs. 18%).

Outlook. The group cautioned that the global outlook may weigh down on demand for the sector in terms of sales growth from existing customers and the pace of market expansion. 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. TGUAN is focusing on continued expansion into higher-margin production lines to sustain the plastic segment’s margins going forward.

Maintain FY20E CNP of RM63.3m and introduce FY21E CNP of RM65.0m. FY20-21 will be driven by gradually increasing capacity of c.10% p.a. At current levels, FY20-21E dividends of 9.6-9.9 sen imply 2.3-2.4% yields.

Downgrade to MARKET PERFORM (from OP) on an unchanged Target Price of RM4.10. Our TP is based on an unchanged FY20E FD EPS of 34.4 sen and an ascribed PER of 12.0x (5-year historical average valuations). Going forward, we may look to lift our valuations further should we see improved earnings and strong margin growth above historical high of 9.7%. However, given the strong share price run-up (+30%) since our Target Price upgrade on 21st November 2019, we believe upsides are limited in the near term while we also take cue from challenging market conditions that may limit demand for now.

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

Source: Kenanga Research - 27 Feb 2020