NTPM’s  1QFY15  core  earnings  of  MYR7.0m  were  below  our  and consensus  estimates.  We  attribute  this  to  declining  margins  due  torising raw material prices, labour and utility costs. Accordingly,  we trim our  FY15-16  earnings  forecasts  by  24%  and  19%.  We  downgrade  our recommendation  to SELL  as valuations are unattractive, and lower our FV to MYR0.70 (vs MYR0.82).

Results review. NTPM’s 1QFY15 revenue came in MYR132.2m (+0.4% y-o-y, -2.7% q-o-q) as growth at its paper products division was offset by weaker  showing  at the  personal  care division (-2.4% y-o-y,  -18.6% q-oq). Meanwhile, margins continued  to  shrink, with EBIT and PBT margins slipping  580bps  and  590bps  respectively  due  to  a  surge  in  overhead costs after  higher  electricity and natural gas tariffs took effect from  Jan and May this year  respectively. We note that the latest gas tariff revision saw  natural gas prices increase by an average 20%  per  million British thermal  unit  (mmbtu)  to  MYR19.32  from  MYR16.07.  All  in,  1QFY15 earnings fell 41.5% y-o-y and 40.2% q-o-q to just MYR7.0m.   

Cautious outlook. Management expects business conditions to toughendue  to  escalating  competition  in  the  fast-moving  consumer  goods translate into earnings volatility in the near term. 

Forecasts and risks.  Although management  has embarked on strategic cost management in view of rising raw material and other overheads, we believe  that  there  will  be  a  time  lag  in  its  implementation  of  these measures.  Hence,  we  cut  our  earnings  forecasts  by  24%  and  19% respectively  for  FY15-16.  The  key  risks  include  faster-than-expected margin recovery and favourable changes in raw material prices. 

Downgrade  to  SELL.  Although  we  continue  to  like  NTPM  for  its established  Premier  brand,  we  are  turning  cautious  on  its  business prospects  in  the  coming  year  as  evidenced  by  its  weak  1QFY15 performance.  Hence,  we  downgrade  our  call  to  SELL  (from  Neutral)following our earnings revision, with our FV now lower at MYR0.70 (from MYR0.82),  based on an unchanged  15.5x P/E on CY15 EPS.  The stock is  currently  trading  at  a  CY15  P/E  of  18x,  which  we  deem  slightly expensive relative to its peers’ 16x.

Source: RHB