1QFY22 CNP of RM24.9m (+10% YoY, +8% QoQ) at 21%/22% of our/street full-year estimate is deemed within expectation due to better product mix and cost management. Despite the hike in resin prices and other challenges that affects its productivity, TGUAN can sustain its margins with a well-diversified product portfolio to cater to different markets. We continue to favour TGUAN on robust demand and capacity expansion. Maintain OP with unchanged TP of RM3.90 based on FY22E EPS of 30.0 sen at 13x PER.

In line with expectation. 1QFY22 CNP of RM24.9m came within our/consensus expectation at 21%/22% of our full-year estimate. 1QFY22 dividend of 1.25 sen is also within our estimate.

YoY, revenue surged 18% to RM333m, mainly lifted by higher ASP across its plastic packaging segment products and higher sales volume for its consumable products. EBIT rose by 11.6% due to a better product mix and operational cost efficiency. All in, CNP rose by 10.1% to RM24.9m.

QoQ, revenue rose slightly by 1.3% due to higher ASP and higher sales volume from its nano stretch film and food wrap division, mitigating the fall in sales volume in the garbage bags and courier bags division. Labour shortage and customers’ supply chain issues contributed to the decline in sales. TGUAN sees these issues as temporary and cyclical in nature. Despite the challenges, the group’s EBIT rose by 2% as EBIT margin was fairly stable at 9.4%, likely due to a favourable product mix. CNP rose by 8.3% on account of lower effective tax rate of 20.4% (vs. 4QFY21: 21.4%).

Outlook. Despite crude oil prices still above USD100/barrel and a prolonged supply chain disruption, resin prices are showing signs of softening. We expect resin prices to stay stable at these still elevated levels until 1HCY22 with ASP remaining elevated. We continue to like TGUAN on the following factors; (i) sustainable product demand, especially for the nano stretch film and others, (ii) capacity expansion for its premium products to continue fuelling long-term growth, and (iii) stronger USD/RM forex which will benefit the group which receive sales proceed in USD. With the completion of its new factory, we expect an increase in production output to cater to robust demand for the premium stretch film and courier bags, while installation for three premium blown lines is expected to be completed by 2QCY22. The reopening of economic activities has boosted the food sector; we continue to see TGUAN’s food wrap division improving its top-line in the subsequent quarters, which was loss-making in FY21 due to lockdowns. However, we expect challenges to continue, such as severe labour shortage issues, increased production costs on raising minimum wages, and shifts in consumers’ behaviour.

There are no changes to FY22E/FY23E earnings as we expect earnings to catch up in subsequent quarters.

Maintain OUTPERFORM with an unchanged TP of RM3.90 pegged to an unchanged FY22E PER of 13x, at 1.5SD above its 5-year mean to account for sustainable demand and ongoing expansion of its premium products manufacturing capacity.

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 - 27 May 2022