TGUAN’s 1HFY23 results disappointed due to soft demand. However, it is not slowing down its marketing efforts (particularly, via participation in international trade shows) and R&D (to innovate environmentally-friendly packaging products). We cut our FY23F and FY24F earnings by 7% and 5% respectively, lower our TP by 5% to RM3.05 (from RM3.22) but maintain our OUTPERFORM call.

Below expectations.Its 1HFY23 core net profit missed both our full year forecast and the full-year consensus estimate by 8% each.The key variance against our forecast was weaker-than-expected sales volume amidst global economic uncertainties.

Results’ highlights. YoY, its 1HFY23 revenue declined 15% due to a reduction in sales volume primarily attributed to its plastic packaging products, coupled with lower ASPs (in tandem with falling resin prices). Its CNP fell 26% largely due to increased labour and electricity costs. Recall, the higher labour expenses stemmed from an upwards adjustment in the statutory minimum wage effective May 2022, and the decrease in the maximum weekly working hours effective Jan 2023.

QoQ, its revenue dropped 7% mainly due to lower sales volume of its various plastic packaging products, including stretch films, industrial packaging and garbage bags. Its CNP inched up slightly by 1% given lower amount of losses on foreign currency exchange.

Outlook. We expect 2HFY23 demand outlook to continue to be weighed down by challenging global environment. This is because interest rate hikes and inflationary pressures have caused consumers to be more cautious on spending, subsequently lowering their demand for packaging products. Additionally, we understand that TGUAN’s 9th nano stretch film line has yet to commence production and the investment in a 10th nano stretch film will be deferred to FY24 amidst an uncertain outlook.

However, we remain optimistic that TGUAN’s continuous efforts in promoting sustainable packaging solutions internationally will materialize in the next few years. This in turn could accelerate its growth trajectory, assuming the global demand for plastic packaging materials has recovered by then. This positive outcome is largely attributed to its active engagement in packaging tradeshows worldwide (including key regions like China and Europe), as well as its more environmentally friendly nano stretch films (which sits well with stricter environmental regulations in Europe with better load stability). On an encouraging note, TGUAN is set to participate in another upcoming tradeshow in Las Vegas, USA in Sep 2023.

Forecasts. We cut our FY23F and FY24F earnings by 7% and 5%, respectively, to reflect softer top line and higher overhead costs (e.g. utilities).

We reduce our TP by 5% to RM3.05 (from RM3.22) with an unchanged ascribed PER of 11x, 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 4).

We continue to like TGUAN due to: (i) the growth potential of the local plastic packaging sector, as Malaysian players like TGUAN are gaining market shares from overseas producers that are losing competitiveness due to rising production costs, its aggressive push into the European and US markets with environmentally friendly products, (ii) its earnings stability underpinned by a more diversified product portfolio and steadily growing clientele base, and (ii) its expansion plans for premium products, such as nano stretch films, courier bags, food wraps and some industrial bags (wicketed bags, oil/flour/sugar bags). Reiterate OUTPERFORM.

Risks to our call include: (i) a sudden surge in resin costs, (ii) weak demand for packaging materials due to prolonged global recession, and (iii) labour shortages and supply chain disruptions.

Source: Kenanga Research - 25 Aug 2023