TGUAN is solidifying its position as a leading innovative stretch film player in the region. While demand from Europe and North America remains slow, TGUAN is ready to seize more market share there, helped by innovative products. Meanwhile, TGUAN has ventured into developing commercial properties which should enhance medium- term earnings even though it is small now. We maintain our forecasts, TP of RM2.80 and OUTPERFORM call, as we believe recent its share price decline is excessive compared to the forex impact to earnings.

We came away from a recent visit to TGUAN feeling reassured of its long- term prospects. The key takeaways are as follows:

1. Innovative Stretch Films Propel Global Market Expansion. Its stretch film division, accounting for half of TGUAN's sales, is set to remain the primary growth driver over the coming years. Utilizing its proprietary nano stretch film technology, TGUAN's thinner yet stronger films that use less resin are thus more cost-effective and have enabled it to secure new customers, while a double-digit YoY growth in the US is expected. With only a <5% share in the European and US markets, there is significant room for expansion.
2. Growth in Industrial Bags and New Product Lines. TGUAN is ramping up the production of its industrial bag division due to increased orders on packaging products for products like bread, oil, and sugar. This segment contributed 18% to its revenue in 2QFY24, up from 17% the previous year. The commissioning of a new stretch hood line enhances production efficiency, as it allows existing lines to focus on shrink film production. The company is promoting shrink films to local suppliers for bundling products like mineral water bottles, offering benefits such as lower transportation costs and improved recyclability over traditional carton boxes.
3. Recent Diversification into Property Development. While maintaining its core in plastics, TGUAN has entered into a JV with Perbadanan Kemajuan Negeri Kedah (PKNK) to undertake a commercial development project spanning approximately 30 acres. With a gross development value (GDV) of RM221m over the next five years, the project involves the construction of 221 shop lots and an 80-room budget hotel over the next three to five years. Given the strategic location of the landbank (see map overleaf), this venture should add to the group earnings over the medium term.

Despite facing soft demand, we estimate TGUAN is ahead of its rivals in managing potential headwinds like pricing pressures from a stronger MYR and higher wage costs through improved operational efficiency and a richer sales mix. Demand in the Japanese market, which we estimate at 15─20% of total sales, has also increased, boosted by a stronger yen and better consumer spending, enhancing sales of garbage bags and kitchen bags, raising its current ulitisation rate to 70%.

Forecasts. Maintained. Every 10% rise in the MYR against the USD should only impinge its earnings by 3% and thus we believe this price weakness would be an accumulation opportunity, although there is a timing effect i.e. in the upcoming quarter, there may be an initial compression of margins as existing inventory that was bought on higher USD cost gets cleared out, before the benefit of cheaper resin cost in MYR terms is reflected.

Valuations. We also keep our TP of RM2.80 based on 11x FY25F 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 bread bags, oil/flour/sugar bags). We believe the recent drop in its share price is also due to investors' concern on volume growth. However, innovative initiatives by TGUAN may act as a re-rating catalyst as soon as it successfully gains more market share in the advanced economies. 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) supply chain disruptions.

Source: Kenanga Research - 22 Oct 2024