TGUAN guided for improved margins for its stretch film, which is marketed in the export market as a premium packaging solution. We are mildly positive on its new RM200m commercial development project in Sungai Petani, Kedah, given the incremental profits, albeit small. We maintain our forecasts, TP of RM2.86 and OUTPERFORM call.

We came away from a post-results engagement with TGUAN feeling reassured of its long-term prospects. The key takeaways are as follows:

1. Its stretch film division, which accounted for half of its turnover in FY23, is enjoying better margins. It is able to sell its products at higher prices by offering improved packaging solutions, meeting diverse industry needs for enhanced protection and efficiency. It is growing its client base and market shares in Europe, the US and Asia for its stretch film, especially nano stretch film.

2. TGUAN recently set up a new company in Spain to step up direct collaboration with local brand owners. While it has been relying on a Spanish distributor for years, certain major local MNCs prefer to engage directly with their plastic packaging suppliers. This is in-line with its strategy to go direct to end-users which will also improve its supply-chain management in Europe. In FY23, Europe made up 14% of its total sales.

3. With regards to its JV with land owner Perbandaran Kemajuan Negeri Kedah (PKNK) to develop a 20-acre land in Sungai Petani, the plan is to build a mini administrative and commercial hub with shop lots, offices, a shopping complex, a multi-storey car park and a hotel. Recall, the RM200m project is located in the northern part of the town, near Sungai Petani Utara Toll Plaza and within minutes from key amenities, including government offices, hospitals and shopping malls, with surrounding neighbourhoods such as Bukit Banyan and SP Saujana. We are mildly positive on the project that should get off the ground in 2HCY24 as it should bring in incremental profits to TGUAN, albeit small.

Forecasts. Maintained as we have already factored in higher margins for its stretch film.

Valuations. We also keep 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 from exports as more competitive local players, such as TGUAN, gain market shares from overseas producers, (ii) its aggressive push into Europe and US markets with environmentally-friendly, high-performing products, and (iii) its expansion plans for premium products, such as nano stretch films, food wraps and some industrial bags (wicketed bags, oil/flour/sugar bags). Reiterate OUTPERFORM.

Source: Kenanga Research - 31 May 2024