TGUAN’s 9MFY23 results disappointed due to weaker-thanexpected sales. The sector’s near-term outlook is weighed down by the global economic slowdown. TGUAN’s efforts to expand its higher-margin products such as the nano stretch film will help mitigate rising cost pressures. We cut our FY23F net profit forecast by 5% but maintain our TP of RM3.05 and OUTPERFORM call.

Below expectations. Its 9MFY23 core net profit of RM62.7m(-7.8% QoQ, -23.7% YoY) missed expectations, coming in at only 69% of both our full-year forecast and the full-year consensus estimate. The variance against our forecast came largely from the absence of a significant pickup in sales during the seasonally strong year-end period and a higher tax rate.No dividend was declared for the third quarter.

Results’ highlights. YoY, its 9MFY23 revenue dropped 14% primarily attributed to: (i) lower sales volumes of various plastic packaging products including garbage bags, food wraps and courier bags, and (ii) reduced ASPs, in tandem with the downtrend in resin prices. Its bottom line fell by a larger 24% due to: (i) heightened labour and electricity costs, (ii) increased interest expenses, and (iii) higher selling and distribution expenses.

QoQ, its revenue improved 9% driven by a pickup in sales volumes of its various plastic packaging products, such as stretch films, industrial packaging and garbage bags. However, its core net profit eased 8% due to the increase in utility costs and a higher effective tax rate.

Forecasts. We reduce our FY23F earnings by 5% in line with softer top line. We also trim our FY23 dividend forecast to 2.25 sen (from 4.75 sen).

However, we keep our TP of RM3.05 based on an unchanged ascribed FY24F 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).

Outlook.The outlook for the plastic packaging industry is subdued in 4QFY23 given the slowing global economy on various macroeconomic challenges coupled with heightened geopolitical tensions in the Middle East and Eastern Europe. TGUAN remains steadfast in focusing on sustainable packaging solutions such as nano stretch film which fetches higher margins. We believe the improved product mix can alleviate cost pressures. In addition, it is expanding its presence in Europe, US and South America over the next 3-5 years, which it believes are relatively untapped by Malaysian players at present.

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 (iii) 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 - 24 Nov 2023