We continue to project earnings growth for TGUAN in FY23F, although we reduce the growth rate to 5.9% (from 27.1%). This is due to higher electricity cost, and while the demand for its nano stretch films remains resilient, its conventional stretch films will be hit by a slowing global economy. We maintain our FY22F earnings forecast but cut our FY23F number by 17%. We lower our TP by 18% to RM3.28 (from RM3.99) but maintain our OUTPERFORM call.

We came away from a recent engagement with TGUAN feeling mixed. The key takeaways are as follows:

1. TGUAN guided for an additional cost of RM12−14m annually on the heels of the hike in the electricity tariff from 1 Jan 2023. This is equivalent to 6−8% of our previous FY23F PBT forecast.
2. TGUAN guided for contrasting outlook for nano and conventional stretch films. The demand for its nano stretch films is resilient, especially in the US and Europe, driven largely by the growing acceptance of the product (that is cheaper on a per metre basis given that it is thinner by downgauging but equally sturdy). TGUAN will continue to expand its market through distribution channels and selling direct to end users. TGUAN is adding one mobile test lab (a truck equipped with testing machines to perform the test for customers) in Europe to a total of 4 mobile test labs in FY23. However, the same cannot be said for its conventional stretch films amidst a slowing global economy.
3. The commissioning of its 9th and 10th nano stretch film lines, scheduled for 1QFY23 and 2QFY23 respectively, is on track. Similarly, currently undergoing test runs, three new blown film lines shall commence production in Jan 2023 as planned. The three new lines will produce oil bags, sugar bags, flour bags, wicketed bags, and lamination films used mainly in the industrial, F&B, and FMCG sectors.
4. TGUAN is acquiring two new blown film lines (4th and 5th) for its new plant for c.RM13−14m to expand the production of blown film products such as shrink film and stretch hood. The machines are expected to be operational by end-FY23, with maiden contributions expected in FY24. We understand that part of the new capacity has been filled by orders from a new customer, i.e. a Europe-based building material company.

Forecasts. We maintain FY22F earnings forecast but cut our FY23F number by 17% to reflect the higher electricity tariff and weaker demand on a slowing global economy.

We expect a less favourable demand outlook for the plastic packaging sector in 2023 on the back of a slowing global economy, while supply chain disruptions continue to linger, affecting the operations of end users (and hence their demand for plastic packaging). We expect a soft patch, especially during 1HFY23. This will be partially mitigated by: (i) the easing of labour shortages, resulting in better productivity and efficiency gains; (ii) improved margins as high-cost resin inventory is gradually depleted; and (iii) the declining cost of input resin (see Chart on next page).

We see TGUAN’s added strengths in: (i) its earnings stability underpinned by a more diversified product portfolio; and (ii) its long-term growth prospects backed by capacity expansion for its premium products (nano stretch films, courier bags, food wraps and some industrial bags (wicketed bags, oil/flour/sugar bags).

We cut our TP by 18% to RM3.28 (from RM3.99) based on 11x FY23F PER, at a discount to the sector’s average historical forward PER of 13x to reflect TGUAN’s low share liquidity. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5). Maintain OUTPERFORM.

Risks to our call include: (i) sustained higher resin cost; (ii) the demand for packaging materials hurt by a global recession; and (iii) prolonged labour shortages.

Source: Kenanga Research - 23 Dec 2022