NTPM’s 1HFY16 earnings exceeded expectations on the back of elevated sales mix and a muted negative impact of its USD exposure. In view of its impressive results, we upgrade to BUY with a MYR0.89 TP(from MYR0.75, 19% upside). We like the firm for the resilient demand for its products, coupled with enhanced margins going forward arising from greater economies of scale and better sales mix.

Above expectations. NTPM’s 2QFY16 (Apr) MYR17m net profit took 1HFY16 earnings to MYR30m. We deem the results above expectations at 61% and 60% of our and consensus bottomline estimates respectively. The upside surprise was primarily on a 3.9ppts margin expansion due to a muted negative impact of the USD exposure. It was alleviated through strategic purchases and sufficient stocked-up inventory levels. Aside from that, NTPM’s personal care segment made headway into a previously underserved delivery channel. This, combined with some possible downtrading towards its mass segment product, further enhanced its economies of scale, resulting in segmental earnings growing 187% YoY. No dividend was declared, as expected.

Downside risk addressed. The essential nature of NTPM’s products predicates resilient demand for its products amidst rising living costs. Concern is shifting to its cost structure, with USD exposure arising from raw material purchases. However, this has been alleviated somewhat with NTPM’s strategic purchases and limited downside risk to USD further appreciating from our MYR4.30/USD assumption for FY17F/FY18F.

Forecasts and risks. In view of the better-than-expected earnings, we lift our FY16F/FY17F/FY18F net profit by 21%/17%/8% respectively,factoring in improved margins and sales at its personal care segment. The key risks are intensifying competition, strengthening of the USD against the MYR and a larger-than-expected rise in raw material prices.

Upgrade to BUY. NTPM’s strategic raw material acquisition and increased sales from its personal care segment allays margin compression concerns. Upgrade to BUY with a higher MYR0.89 TP based on an unchanged 15.5x 2016F P/E. This is in line with its 3-year historical trading mean (14.8x) and its peers’ 2016F P/E average of 16.5x. Our corroborative DCF valuation is also supportive of our TP (Figure 7). It offers decent dividend yields of 3.2-3.8% for FY16F-18F.