1HFY20 CNP of RM37m came in within our expectation, at 53% of full-year forecast. 1HFY20 dividend of 4.0 sen is deemed broadly within (50%). We remain cautious on the Covid-19 pandemic, but given the stellar 2QFY20 results, we are positive on its 2H prospect. The group is actively seeking new customers in the export markets and focussed on improving product margins. Maintain FY20-21E CNP. Upgrade to OUTPERFORM (from MP) with a higher TP of RM5.65 (based on 13.8x PER on FY21E EPS) from RM4.00.

1HFY20 within with Core Net Profit (CNP) of RM37m meeting our expectation at 53%. No consensus was available as the stock is not widely tracked. 2QFY20 dividend of 2.0 sen brought 1HFY20 dividend to 4.0 sen which is within our FY20E NDPS of 8.7 sen, at 50%.

Results’ highlight. YoY-Ytd, top-line increased by 6% on strong sales from the main driver, the plastic segment (+4%) from stretch film, courier bags, and premium packaging films while the F&B segment was also up (+22%). As a results, EBIT margin also improved on better product mix and lower raw material prices (+3.0ppt), which resulted in bottom-line increasing by 42%. QoQ, top-line was down by 7%, likely due to the decrease in average selling prices, in line with lower resin prices for the plastic packaging segment (-6%). That said, EBIT margin was still stronger (+2ppt) on better product mix and its impact more than offset the higher effective tax rate of 18.2% (vs. 16.2%), resulting in CNP rising by 2% QoQ.

Outlook. The Group remains cautious of a possible new wave of Covid- 19 infection but is adapting well to the new normal, focussed 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 higher-margin production lines to sustain the plastic segment’s margins going forward. TGUAN has also proposed a 1-for-1 bonus issue which we view positively as it enhances liquidity and increased market participation. The proposed bonus issue is expected to be completed in 4QFY20 with the entitlement date to be determined later.

Maintain FY20E/FY21E CNP of RM69.7/RM78.3m. We are positive on its prospect given that sales have remained strong during the MCO, aided by low resin cost. We are expecting utilisation rate to 75-80% in FY20- FY21 with FY20E/FY21E CNP growth of 12%/12%. At current levels, FY20E/FY21E dividend of 9.0 sen/10.1 sen implies 1.7%/1.9% yield.

Upgrade to OUTPERFORM (from MP) with a higher Target Price of RM5.65 (from RM4.00) with an ex-all TP of RM2.83 (post 1-for-1 bonus issue) as we roll our valuation to FY21E FD EPS of 40.9 sen (from average FY20-21E EPS of 39.8 sen) and a higher ascribed PER of 13.8x (+0.5SD to 5-year historical valuations) from 10.0x (-0.5SD to 5-year historical valuations). Our valuation are at the higher-end among plastic packagers under our coverage (-2SD to -1SD) as TGUAN (i) has been able to record better than average margins amidst the Covid-19 pandemic, (ii) is in the right segment namely F&B and courier bags, and (iii) is actively looking to increase sales in export markets in 2H. With its 80% utilised capacity at the highest (vs. peers of 40-75% in FY20), a healthy balance sheet and strong net cash position of RM95m (a strong quality given the challenging CY20), the Group should have no issue committing to dividends.

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

Source: Kenanga Research - 21 Aug 2020