1HFY20 CNL of RM0.4m is above expectation of FY20 CNL of RM22.8m as we anticipated weaker top-line and operating losses ahead. No dividends declared, as expected. Increase FY20-21E earnings to CNP of RM2.0- 3.3m (from CNL of RM22.8-14.3m). Maintain UNDERPERFORM but on a higher TP of RM0.415 (from RM0.220) post updating our PBV to 1.25x (from 0.78x).

1QFY20 core net losses (CNL) of RM0.4.0m is deemed above our expectation, as we expected a weaker top-line due to challenges from Covid-19 (top-line came in at 56% of our FY20 estimate), while we anticipate operating losses as the Group has struggled to maintain profitability since 4QFY18. However, 2QFY20 CNP margin was stronger than expected at 7.4% on lower overheads from cost control measures (vs. our expectation of a loss). No dividends declared, as expected.

Results’ highlight. 1HFY20 recorded CNL of RM0.4m vs. RM6.5m in 1HFY19 driven by: (i) improving top-line (+5.9%) on increased international sales, (ii) lower operating loss of RM1.1m (vs. RM5.2m) due to a reduction in overheads, and (iii) marginally lower financing cost of RM1.3m (vs. RM1.8m). QoQ, top-line was up by 45% on increased international sales on higher demand for packed food during the Covid-19 pandemic. Consequently, the Group finally recorded RM4.6m operating profit (vs. RM5.8m operating losses in 1QFY20) on lower overheads. All in, the Group was able to return to the black with a CNP of RM3.5m (vs. CNL of RM4.0m) after six consecutive lossmaking quarters.

Outlook. The Group has installed most of the major equipment in its new Senai factory. 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 leveraging on improving demand for F&B products in light of the Covid-19 pandemic, which would be crucial given the past few loss-making quarters.

Increase FY20-21E earnings to RM 2.0-3.3m (from CNL of RM22.8- 14.3m). In light of a sterling 2QFY20, we increased our top-line projections by 13-3% for FY20-21 on increased demand for TOMYPAK’s products. We expect margins to improve in coming quarters (from loss making) but we do not expect margins to be as strong as in 2QFY20 as overheads would have increased post MCO phases. All in, we increase CNP margin to 1.2-1.9% (vs. CNL of RM22.8-14.3m). No dividends expected for now.

Maintain UNDERPERFORM on a higher Target Price of RM0.415 (from RM0.220). We increase our TP post updating our PBV to 1.25x @ -1SD to 5-year historical average (from 0.78x @ -2.0SD) on FY21E BVPS of RM0.33 (from RM0.28) given the improvement in earnings this quarter. However, we maintain our below average valuations given six consecutive loss-making quarters since 4QFY18, and remain cautious on margin improvements given the rising overhead cost in coming quarters. We may look to upgrade TOMYPAK further upon stable positive earnings and margins in coming quarters.

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 - 19 Aug 2020