TGUAN’s FY23 results met expectations. We expect better days for the industry driven by some restocking, firmer economic recovery, and market share gains. TGUAN’s focus on premium stretch film and blown film products in the European and US markets should support an upward earnings trajectory over the next few years. We maintain our forecasts, TP of RM2.86 and OUTPERFORM call.

Within expectations. Its FY23 core net profit of RM83.7m (after excluding RM10m impairment loss on receivables and RM2.8m unrealised forex loss) met expectations. The company ended the year with strong net cash position of RM98m, up from RM47m a year ago.

It declared a DPS of 3.0 sen in 4QFY23, bringing the full-year dividend to 4.25 sen (compared to our FY23 dividend forecast of 2.25 sen).

YoY, its FY23 turnover declined 11% primarily due to: (i) slowdown in plastic packaging segment (-12%) especially for its garbage bags, courier bags and food wrap, and (ii) reduction in ASPs (in tandem with lower resin costs) for its stretch films and industrial bags and films.

Its core net profit contracted by a sharper 24% due to: (i) higher selling and distribution expenses, (ii) increased finance costs, and (iii) elevated labour and utility costs. Recall that in Aug 2023 after the Green Electricity Tariff program was discontinued, TGUAN saw an increase of c.RM1m/month in electricity expenses until it transitions to alternative renewable electricity sources including the expansion of its own solar installation.

QoQ, its 4QFY23 revenue remained relatively stable with no significant fluctuations in sales volume. Nevertheless, its core net profit rose slightly by 6% likely attributed to improved product mix which helped mitigate higher utility costs.

Outlook. TGUAN continues to focus on European and American markets for its premium stretch film and blown film products, which offer better margins. These regions are key global markets for plastic products, currently remains largely untapped by Malaysian players.

We believe TGUAN is well-positioned to capture market share through its innovative nano stretch film and proactive marketing strategies including: (i) active participation in trade fairs, (ii) expansion of Newton R&D centre, and (ii) its renowned mobile test truck, equipped with advanced load stability testing.

On a less positive note, we are concerned over the rising freight costs amidst the recent Red Sea crisis. These costs may compress margins as TGUAN seeks to stay price competitive in Europe and North America, while also planning to enter the Latin American market.

Forecasts. We maintain FY24F earnings forecasts and introduce our FY25F numbers.

Valuations. We also maintain our TP of RM2.86 based on 11xFY24F 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 4).

Investment case. We 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 American 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 spike in resin costs, (ii) weak demand for packaging materials arising from extended global recession, and (iii) supply chain disruptions.

Source: Kenanga Research - 29 Feb 2024