9MFY20 CNP of RM56.9m came above our expectation at 82% on better-than-expected product mix. Dividend of 5.0 sen is deemed broadly within (57%) as we expect the bulk of payout in 4QFY20. Given its consistently expanding CNP margins on better product mix, we raise FY20E/FY21E CNP by 10%/9% to RM76.7m/RM85.2m. TP is raised to RM3.25 (from RM2.80, post bonus) on a higher PER of 14.5x (from 13.8x) @+1.5SD (from +0.5SD) but recommendation downgraded to MARKET PERFORM from OUTPERFORM following the strong share price rally YTD, which means valuations now appear fair, in our view.

Results above expectation. 9MFY20 CNP of RM56.9m came above our expectation at 82%. Top-line is within at 74%, but the deviation was due to better-than-expected CNP margin of 7.9% (vs. our estimate of 7.2%) on a better-than-expected product mix, which was impressive given rising resin cost during the quarter.

Results’ highlight. YoY-Ytd, CNP increased by 31%. Top-line increased by 2% on strong growth from the F&B segment (+42%) while plastics reported higher PBT contribution due to better product mix, resulting in stronger plastic segment PBT margin to 11% (from 7.9%). QoQ, top-line improved by 8% due to greater sales of stretch films, premium packaging films and courier bags.

Outlook. The Group has remained consistent with earnings delivery and improving margins on better product mix and aims to target more export markets in the near term. It is also concentrating on continued expansion into higher-margin production lines such as the newly commissioned premium stretch film line and a new premium blown film line to sustain the plastic segment’s margins going forward.

Increase FY20E/FY21E CNP by 10%/9% to RM76.7m/RM85.2m from (RM69.7m/RM78.3m) on better-than-expected margins driven by consistently better product mix despite the uncertain environment and rising resin costs. As such, we increase our CNP margin assumptions to 7.9-8.2% (from 7.2-7.5%) while top-line is left unchanged. We maintain our 24% dividend payout assumption in FY20-21 to be prudent, as the uncertain operating environment may see it preferring to conserve cash. Our payout assumption translates to FY20-21E DPS of 4.8-5.3 sen (from 4.4-4.9 sen post bonus issue, or 9.6-10.7 sen from 8.7-9.8 sen pre bonus issue).

Downgrade to MARKET PERFORM (from OP) with a higher Target Price of RM3.25 (from 2.80) as we ascribed a higher FY21 PER of 14.5x (+1.5SD to 5-year historical valuations from 13.8x or +0.5SD to 5-year historical valuations) to our revised FY21E FD EPS of 22.3 sen (from 20.5 sen). We believe the higher multiple is justified as TGUAN is: (i) achieving higher CNP margins and better product mix amidst the Covid-19 pandemic, (ii) in the right segment namely F&B packaging and courier bags, and (iii) actively looking to increase sales in export markets. 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 RM120m (a strong quality given the challenging CY20), the Group should have no issue maintaining dividends. However, we believe the abovementioned positives have largely been reflected in the stock’s share price following the rally of 93.5% YTD.

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

Source: Kenanga Research - 19 Nov 2020