Maintain HOLD

We expect core net profit turnaround in 2Q19 on the improvement in sales volume, lower raw materials inventory and a positive effective tax rate. That said, we leave our FY19E-21E forecasts unchanged as we have already factored in the aforementioned factors. Our TP is also unchanged at MYR0.49 based on an unchanged 22.3x FY20 PER, +1std to its 5-year average. Maintain HOLD as we think the market has already priced-in its positive earnings growth.

Expect Earnings Turnaround in 2Q19

We expect TOMY to make a quarterly core net profit turnaround in 2Q19 from a core net loss of MYR4.3m and MYR2.2m in 1Q19 and 2Q18 respectively. This would narrow its 1H19 loss and keep it on-track with our FY19E core net profit of MYR2.3m. The turnaround would be driven by (i) an improvement in sales volume to international and local customers and (ii) the recognition of tax income and deferred tax assets.

Lower Raw Materials Costs

The positive results would also be attributed to cheaper raw materials inventory, assuming they were procured in 1Q19. On average, resins prices - polyethylene and polypropylene prices declined 5-8% QoQ and 10% QoQ, and solvent prices dropped by 13% QoQ in 1Q19. Meanwhile, ink price stayed flattish QoQ in 1Q19. We posit that the decline in resin prices could be due to the disruption of global supply chain as a result of the 25% tariff China imposed on U.S. petrochemical exports and theoretically, prices could be more volatile going forward, as a result. We expect raw materials costs that are in USD are largely mitigated by approximately 45-50% of revenue from export sales in USD.

No Changes to Earnings Forecasts

We leave our FY19E-21E core net profit forecasts unchanged as we have already imputed higher sales of 14% YoY for FY19E. We also expect lower raw materials costs to be offset by the start-up cost at its new Senai plant, production lines rationalisation cost and higher overhead costs.

Source: Maybank Research - 29 Jul 2019