TGUAN’s 1HFY24 results disappointed due to cost pressures. Nonetheless, 1HFY24 core net profit rose 7% YoY driven by stronger sales in plastic packaging and F&B divisions. Despite some cost pressures and stronger MYR, TGUAN remains poised to grow in Europe and US in the longer term, thanks to product innovation. We trim our FY24F and FY25F earnings forecasts by 8% and 12%, respectively. However, we maintain our TP of RM2.86 as we roll forward our valuation base year to FY25F (from FY24F), with our ascribed PER unchanged at 11x. Reiterate OUTPERFORM.

TGUAN’s 1HFY24 core net profit of RM43.7m missed our expectation at only 43% of our full-year forecast but met expectations at 46% of the full-year consensus estimate. The key variance against our forecast stemmed from higher-than-expected cost pressures (e.g. labour and logistics costs). Nonetheless, 1HFY24 revenue grew 7% YoY on higher sales volumes in plastic packaging (including industrial packaging and garbage bags). The F&B division also did well, especially its coffee and tea segments, as consumers shifted toward local products. 1HFY24 core net profit inched up 2% on stable margin as gains from operating scale offset cost pressures.

A DPS of 2.5 sen was declared in 2QFY24 (vs. no dividend in the previous quarter), on track to meet our full-year forecast of 5.5 sen.

QoQ, 2QFY24 turnover declined 12%, likely due to seasonally lower production during the April’s Hari Raya break. Correspondingly, core net profit fell by 13%, in line with the decrease in revenue.

Outlook. The global market demand is expected to remain flattish in light of prolonged inflation in advanced economies and ongoing geopolitical tensions. Despite this, TGUAN continues to focus on growth through innovation. It recently launched “Maxstretch Regen”, a thin- gauge hand stretch film with 30% post-consumer recycled (PCR) content aimed at the European and US markets, that are sizeable markets for plastic products which are still largely untapped by many Malaysian players. In FY23, Europe and US markets accounted for 14% and 7% of its sales, respectively. We believe TGUAN can expand its market share through cutting-edge technology and proactive marketing, R&D and mobile load stability testing capabilities to provide assurance to new buyers.

Meanwhile, we are mindful of the stronger MYR against USD that could cap some pricing advantages and lead to potential margin pressure, given that >70% of TGUAN’s revenue is derived from exports, predominantly transacted in USD. Nonetheless, the bulk of production costs (i.e. resin) is also USD-denominated, hence margin is somewhat hedged, and we believe more favourable product mix with a greater proportion of high-margin premium offerings, such as nano stretch film could offset the impact of USD on margins. Notably, the overall utilisation rate for its plastic packaging division remains stable at about 70%.

Forecasts. We cut our FY24F and FY25F earnings forecasts by 8% and 12%, respectively, to reflect higher cost pressures.

Valuations. However, we maintain our TP of RM2.86 as we roll forward our valuation base year to FY25F (from FY24F) while keeping the ascribed PER unchanged at 11x. Our ascribed PER reflects a discount to the sector’s average historical forward PER of 13x to reflect TGUAN’s low share liquidity. Its strong net cash position stands at RM150m (vs RM91m as at 31 Dec 2023). 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 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). Maintain OUTPERFORM.

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

Source: Kenanga Research - 22 Aug 2024