3QFY21 CNP of RM21.5m brought 9MFY21 CNP to RM70.3m, which is within our expectation, at 76% of full-year forecast. QoQ, core earnings fell 18% due to Covid-19 related production disruption. 9MFY21 DPS of 3.25 sen is in-line with estimate. We continue to favour TGUAN on the back of its healthy >80% utilisation rate, and higher ASPs to match rising resin costs. We raise FY21E CNP by 3% to account for a faster-than-expected increase in ASPs, but maintain our FY22 estimates. We reiterate OUTPERFORM with a higher TP of RM3.68 (from RM3.40) at 14x ESG-PER on FY22E EPS of 26.3 sen.

9MFY21 CNP within estimates. 9MFY21 revenue/CNP of RM886.3m/RM70.3m came in line with expectation at 80%/76% of our full- year estimate. 3QFY21 DPS of 1.25 sen brought 9MFY21 DPS to 3.25 sen, which is within our FY21E DPS of 4.5 sen.

YoY, 9MFY21 revenue increased 23.5% to RM886.3m on the back of higher ASPs and higher sales volume from all segments, especially the premium products. Operating profit rose 25.2% due to better product mix, fuelled by its higher-margin premium products, and operational cost efficiency. CNP rose 23.6% in line with PBT’s 23.8% rise.

QoQ, revenue dipped by 3.4% mainly due to lower sales volume in the plastic packaging segment. The decline in sales volume was mainly caused by: (i) global containers shortages and elevated freight costs, and (ii) TGUAN’s temporary production halt due to Covid-19 cases, which delayed shipment of orders. Operating profit also declined by a larger 9.7% due to higher production costs and higher Covid-19 compliance costs. After accounting for the one-off gains and higher effective tax rate of 23.4% (vs. 2QFY21: 22%), CNP declined by 18.1%.

Outlook. Since July, resin prices have increased significantly to levels seen in March 2021 (USD1,300/MT – USD1,700/MT). We assume resin prices will continue to hold at a higher levels (market price of USD1,250/MT to USD1,690/MT) in 4QCY21. We gathered from management that TGUAN has raised its ASPs in tandem with the increase in resin prices, and thus, we believe TGUAN would be able to maintain margins despite the higher resin costs. The demand for its premium products remains robust, which allows TGUAN to continue growing its profit margin over the long term. As lockdowns restrictions have been lifted, TGUAN is currently operating at a utilization rate above 80%, as management continues to work hard to fulfil the strong demand for its stretch film, courier bags and garbage bags. Besides, the 16-acre new factory is expected to be completed by end of 2021 and 1QFY22 and more machineries will be coming in 1QFY22.

Post results, we increase FY21E revenue/CNP by 4%/3% to RM1.1b/RM95.4m to account for a higher-than-expected rise in FY21 ASP and robust demand. We maintain our FY22 estimate as well as FY21E/FY22E DPS of 4.5 sen/5.0 sen, yielding 1.6%/1.8%.

Reiterate OUTPERFORM with higher TP of RM3.68 (from RM3.40) based on FY22E EPS of 26.3 sen and an ascribed ESG-PER of 14x (from 12.9x), which is +1.5SD to its 5-year mean of 9.7x. We maintain our premium valuation for TGUAN for its continued growth in its premium products segment and long-term expansion plans, which we believe will help TGUAN achieve their first RM1b in sales in FY21.

Risks to our call include: (i) faster-than-expected ASP declines, (ii) foreign currencies fluctuations, (iii) labour shortage, and (iv) lower-than-expected margins.

Source: Kenanga Research - 19 Nov 2021