FY19 CNL of RM13.2m is better than our expectation at 79% of our RM16.6m estimate, likely due to lower-than-expected raw material cost. No dividends, as expected. Maintain FY20E CNL of RM12.1m and introduce FY21E CNL of RM10.1m. Maintain UNDERPERFORM and TP of RM0.270.

FY19 core net losses (CNL) of RM13.2m is better than our expectation of RM16.6m. Top-line came within our expectation but EBIT was slightly higher than expected at RM7.6m loss vs. our estimate of RM11.3m loss, likely on lower-than-expected raw material cost. No dividends, as expected.

Results’ highlight. FY19 recorded CNL of RM13.2m vs. RM0.7m CNL which was mainly due to weaker top-line (-6.1%) from reduction in sales, and the absence of tax income (vs. RM9.8m tax income in FY18). QoQ, 4QFY19 recorded lower CNL of RM0.8m vs. corresponding CNL of RM5.9m, assisted by top-line improvement (+14%) as well as the absence of taxes vs. a tax expense of RM1.4m.

Outlook. The Group has installed most of the major equipment in its new Senai factory and expect to move the bag-making machines (by May FY20), metalizer and CPP lines. TOMYPAK’s total capacity is currently at c.40,000MT/year after investing a total capital expenditure of RM166m for the new Senai factory. Going forward, we do not expect any new capacity expansion until FY21. We believe the group’s focus will be on ramping up sales and plant utilisation, which would be crucial given the past few loss-making quarters.

Maintain FY20E CNL of RM12.1m and introduce FY21E CNL of RM10.1m. We make no changes to FY20 earnings as our EBIT margin assumptions are close to current level of RM7.7m losses. No dividends expected for now.

Maintain UNDERPERFORM on an unchanged Target Price of RM0.270. We make no changes to our TP which is based on PBV of 0.88x (-2.0SD to 5-year historical average) which is already at trough levels on FY20E BVPS of RM0.31. We maintain our trough valuations given consecutive loss-making quarters for TOMYPAK but we may look to upgrade upon promising earnings improvements once the Group’s sales and marketing efforts to push top-line sales gains fruition.

Risks to our call include: (i) lower-than-expected resin cost, (ii) better product demand, (iii) stronger-than-expected product margins, and (iv) foreign-currency risk from weakening Ringgit

Source: Kenanga Research - 2 Mar 2020