We understand that TGUAN is experiencing robust demand for its industrial bags, driven by their extensive usage in the resilient F&B and FMCG sectors. Additionally, the company is expanding its presence in the US by setting up new warehouses and a R&D centre. We maintain our forecasts, TP of RM2.86 and OUTPERFORM call.

We came away from a recent engagement with TGUAN feeling upbeat about its outlook. The main takeaways are as follows:

1. Robust demand for industrial bags. TGUAN is enjoying good demand for its industrial bags, which include lamination films, oil bags, sugar bags, shrink film, and stretch hood. We believe the resilient demand for these products can be attributed to their extensive use in the F&B and FMCG sectors, which are less impacted by the global economic downturn. Additionally, the company is getting significant orders, particularly, for its shrink film from breweries and mineral water producers, expanding TGUAN’s market shares in these sub-segments. In FY22, industrial bags accounted for 16% of its total revenue. This should inch up further to around 17%-18% in FY23.

2. New warehouses in the USA. TGUAN has recently set up two warehouses in the USA, situated in Charlotte, North Carolina (36,000 sq ft) and Los Angeles, California (5,000 sq ft). These warehouses will shorten response and delivery times, which will help its distributors to operate more efficiently and position it deeper into the US market. In FY22, North America contributed 9% of TGUAN’s total sales and we believe TGUAN is on track to meet its target to triple its export volume to the US over the next few years.

3. Another R&D centre in the works. TGUAN is planning to set up a fourth Newton global R&D centre in the US, in addition to its three existing ones in Malaysia, Europe and China. The new R&D facility will focus on analysing and optimising solutions for its customers, especially those related to pallet stability for stretch film and hoods, as well as shrink films. The completion is targeted by end-FY24 or FY25

Forecasts. Maintained.

Valuations. We also maintain our TP of RM2.86 based on 11x FY24F 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).

Investment case. 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, (ii) its aggressive push into the European and US markets with environmentally-friendly products, (iii) its earnings stability underpinned by a more diversified product portfolio and steadily growing clientele base, and (iv) 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 - 20 Feb 2024