NTPM’s 1HFY15 (Apr) core earnings of MYR16.2m missed expectations, at 36.3%/31.3% of our/consensus estimates.  We further trim  our FY15F earnings by 12.6%, as we expect the weakening of MYR against the USD to  bring  further  challenges  ahead.  However,  we  upgrade  the  stock  to NEUTRAL with  a  lower TP of MYR0.67  (1.4% downside), as we believe most of the downsides have been priced in since early September.

Better  sales.  NTPM’s  1HFY15  revenue  increased  1.9%  YoY  due  to  a better  sales  performance  across  the  board.  Revenue  from  paper products improved 1.0% YoY,  while  sales from personal care products were  higher  4.0%  YoY,  spurred  by  an  increase  in  demand  for  baby diapers.  However,  core  earnings  fell  42.1%  YoY  during  the  period, largely  due  to  a  surge  in  raw material  costs, labour  and  utilities  costs. Compared with  1Q15, revenue and net profit  in 2Q15  were stronger by 4.4% and 31.4% respectively.     

Lower  margin.  1HFY15  EBIT  and  PBT  margins  trended  lower  by 550bps  and  570  bps  respectively,  both  its  divisions  booked  weaker margins.  Its  paper  product  unit’s  PBT margin  narrowed  to  10.1%  from 15.7%, while  its  personal care  segment saw  its margin decline  to  3.9% from 10%. Both segments have been affected by rising production costs, with  the  strengthening  of  USD  against the  MYR  being  the  contributing factor. It is worth noting that half of the raw materials consumed in the personal care segment is imported in USD terms.   

Forecasts  and  risks.  We  earlier  expected  FY15  to  be  a  challenging year for NTPM. With  its  recent unfavourable forex position, we continue to expect a  slight weakening in NTPM’s margin going forward. Thus, we further  cut  our  earnings forecast  by 12.6% for  FY15,  as  we  revise  our USD/MYR  assumption  to 3.30 (from 3.20),  in line with our house view. Volatile raw material prices and weaker demand remain as the key risks. 

Upgrade  to  NEUTRAL.  We trim  our TP  to  MYR0.67 (from  MYR0.70), pegged  to  an  unchanged  15.5x  P/E  on  CY15  EPS,  which is  at  a  22% discount to its peer average of 20x. However we lift our call to NEUTRAL as  we  believe  most  of  the  downsides  have  been  priced  in.  We  also believe  NTPM’s  on-going  cost  containment  and  optimisation  exercises will put the company in a better competitive position in the future.

Source: RHB