TGUAN’s 1HFY22 results met expectations. We expect ASP to only ease very gradually despite the softer cost of input resin (down c.13-15% YTD) resulting in margin expansion. The stickiness of ASP against downside stems from the robust demand for packaging materials as economies reopen around the world. We maintain our forecasts but raise our TP by 2% to RM3.99 (from RM3.90) as we roll forward our valuation base year to FY23F. Maintain OUTPERFORM.

In line with expectation. 1HFY22 core profit of RM58.2m came within expectations at 50% and 51% of our full-year forecast and the full-year consensus estimates respectively.

1HFY22 core profit rose by 19.2%, in line with revenue which grew 20.8%. The plastic product division’s revenue improved by 21% due to higher sales volume and ASP for its premium products (stretch films and packaging films), and PVC food wrap. The F&B division’s revenue increased by 23% on the stronger sales of beverages and FMCG products in Sabah. EBIT grew by 12.1% due to a better product mix and operational cost efficiency.

Forecasts. Maintained.

Outlook. We expect ASPs to only ease very gradually despite the cost of input resin having softened c.13-15% YTD, resulting in margin expansion. The stickiness of ASP against downside stems from the robust demand especially for its premium products (stretch films, courier bags, and packaging films) as economies reopen around the world.

We understand that TGUAN has obtained the green light from the government to bring in foreign workers with the initial batches to arrive as early as 2H 2022. The new workers should help to boost productivity, especially in the labour-intensive (particularly packaging works) garbage and courier bags segments. With the completion of its new factory, we expect an increase in production output to cater for the robust demand for its premium packaging film, premium stretch film, and courier bags which is seeing demand recovery. We continue to see sustained demand for food wrap division due to the reopening of economic activities with TGUAN gaining market share.

We raise our TP by 2% to RM3.99 (from RM3.90) as we roll forward our valuation base year to FY23F. Our revised TP is based on 11x FY23F PER, at a 10% premium to the sector’s average forward PER of 10x to reflect: (i) TGUAN’s stronger earnings stability underpinned by a more diversified product portfolio, (ii) its strong growth prospects backed by capacity expansion for its premium products, and (iii) its higher market capitalisation and share liquidity vs. peers. There is no change to our TP based on ESG for which it is given a 3-star rating as appraised by us (see Page 4). Maintain OUTPERFORM.

Risks to our call include: (i) sustained higher resin cost, (ii) recovery in demand for packaging materials from the pandemic cut short by a global recession, and (iii) prolonged labour shortages.

Source: Kenanga Research - 26 Aug 2022