All TGUAN’s key segments, i.e. stretch film, blown film and food wrap have shown pick-up in demand as economies reopen, and certain products have also benefitted from margin expansion as selling prices are holding up despite the falling cost of input resin. Its three new blown film lines, commissioned since early this month, have boosted overall production capacity by a third to 200k tonnes/annum.We maintain our forecasts, TP of RM3.99 and OUTPERFORM call.

We came away from a recent engagement with TGUAN feeling positive about its outlook. All key segments, i.e. stretch film, blown film and food wrap have shown pick-up in demand as economies reopen, and certain products have also benefitted from margin expansion as selling prices are holding up despite the falling cost of input resin. The key takeaways from the engagement are as follows.

1. There is strong demand for TGUAN’s nano stretch film—a premium product—in the US and Europe; we understand, as local producers in the US and Europe have to raise prices amidst high energy costs. For the same reason, nano stretch film selling prices have remained relatively firm despite the falling cost of input resin (in tandem with the weaker oil prices), boosting margins (which we have already reflected in our forecasts).Typically, nano stretch film makes up c.50% to its total stretch film production, while stretch film contributes to about half of group revenue.

2. Similarly, there is a strong recovery in the demand for TGUAN’s courier bags (a blown film product) since 3QCY22, as its customers stocks are depleting. TGUAN is able to capitalise on this given a 50% increase in its courier bag manufacturing capacity recently. Courier bags contribute to about 6% of FY21 total revenue.

3. Its three new blown film lines, commissioned since early this month, has boosted its overall production capacity by a third or 50k tonnes/annum to 200k tonnes/annum. For now, the three new lines are mainly designated for the production of oil, sugar and lamination films, largely used in the industrial, F&B and FMCG sectors.

4. Similarly, its food wraps (that makes up 5% of FY21 total revenue) has done well on the reopening of economies with higher demand from the hospitality sector particularly restaurants. The ASP for food wraps has also held up despite the falling cost of PVC resin, resulting in margin improvement that should return the division back to the black from losses in FY21.

5. In terms of its requirement for foreign workers, we estimate that TGUAN currently only managed to meet about 70% (certain processes in the production are highly labour intensive, for instance, the packing of finished courier and garbage bags). It is bringing in new foreign workers in batches from 2HCY22. It has already obtained the approval from the authority to bring in the first batch that should improve the situation to 80% of its foreign worker requirement.

We maintain our forecast and TP of RM3.99 based on FY23F PER of 11x, 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 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 - 19 Sept 2022