1QFY20 CNP of RM18.3m came in broadly within our expectation at 36% on a strong 1Q as expected. 1QFY20 dividend of 2.0 sen was also within (26%). We remain cautious of the Covid-19 challenges on the sector. The group is working hard to push sales, and actively seeking new customers in export markets. Maintain FY20-21E CNP of RM50.4-65.2m. Downgrade to UNDERPERFORM (from MP) on an unchanged TP of RM2.20 (based on 8x PER on FY20E EPS).

1QFY20 broadly within as Core Net Profit (CNP) of RM18.3m came in broadly within our expectation at 36% as we expect 2QFY20 to come in weak amid the Covid-19 outbreak. No consensus was available as the stock is not widely tracked. The deviation from our estimate was due a strong 1QFY20 top-line which came in at 32% of our FY19E CNP and lower than expected tax rate of 16% (vs. our expectation of 18%). The 1QFY20 dividend of 2.0 sen is also within our FY20E NDPS of 7.6 sen, at 26%.

Results’ highlight. YoY, top-line increased by 12% on strong sales from the plastic segment (+12%) from stretch film, industrial bags & films and courier bags, while the F&B segment was also up (+12%) on increased sales of tea and coffee products. Meanwhile, EBIT margin also improved on better product mix and lower raw material prices (+1.8ppt), which resulted in bottom-line increasing by 30%. QoQ, topline was up by 5%, bolstered by sales from the plastic segment (+6%) stretch film, industrial bags & films. However, EBIT margin was down marginally by 0.2ppt while the higher effective tax rate of 16% (vs. 14%) weighed on bottom-line which only increased by 2%.

Outlook. The Group has cautioned that Covid-19 has affected sales and production activities due to travel restrictions as well as the MCO. That said, they are also focused on improving sales and margins for existing products (i.e. stretch film) and aims to target more export markets. It is also concentrating on continued expansion into highermargin production lines to sustain the plastic segment’s margins going forward.

Maintain FY20-21E CNP of RM50.4-65.2m which is driven by gradually expanding utilised capacity of 65-75% in FY20-21. We deem the results as inline as we expected 1QFY20 to be strong given robust sales especially in the months of Jan-Feb. However, going forward, we believe 2QFY20 results would be a litmus test for the severity of the Covid-19 pandemic on earnings. As such, we prefer to be cautious on subsequent earnings, in line with the entire sector. At current levels, FY20-21E dividends of 7.6-9.9 sen imply 2.1-2.8% yields.

Downgrade to UNDERPERFORM (from MP) on an unchanged Target Price of RM2.20. Our TP is based on an unchanged FY20E EPS of 27.4 sen and an ascribed PER of 8.0x SD (-1.0SD to the 5-year historical valuations). Our valuations is on the higher-end among plastic packagers under our coverage (-2SD to -1SD) as the Group’s utilised capacity is on the higher end at >65% (vs. other of 40-60% in FY20). Its healthy balance sheet and strong net cash position of RM87m are positive attributes given that CY20 may be a challenging year. However, given the strong share price run-up (+22%) since our last report (on 3rd April 2020 Plastic Strategy), we believe upsides are limited in the near term while we take cue from the challenging market conditions that may affect the sector for now.

Risks to our call include: (i) volatile plastic resin prices, (ii) foreign currencies fluctuations, and (ii) volatile margin.

Source: Kenanga Research - 19 May 2020