NTPM’s share price has surged 27% since Dec 2015 amidst uncertainty in the broad market. We think current valuations have fairly priced in its firm fundamental prospects. Meanwhile, the recalibration of the foreign workers levy is likely to have an insignificant impact on earnings. We downgrade our call to NEUTRAL, with a tweaked MYR0.94 TP (from MYR0.89, 1% upside) as we change our valuation method to DCF from P/E.

Smooth sailing in Vietnam. We caught up with management in Penang and are encouraged with the progress it has made in Vietnam. While slated t o achieve profitability by FY18 (Apr), we anticipate its Vietnam sales to be growing exponentially, albeit off a low base. Recall that its Vietnamese unitcommenced operations in late 2015 and its production capacity makes up 10%of total group capacity. We believe this will supplement the next leg of growth in the longer term, with mooted plans to: i) add another production line to its sole existing production line in Vietnam, and ii) introduce its personal care segment products such as diapers and sanitary napkins.

Unfazed by potential foreign workers levy hike. Following the recalibration of the federal budget, the proposed foreign workers levy hike has been on hold, before a final decision after the Lunar New Year by the Malaysian Government. Based on the initial proposed hike, the annual levy on foreign workers in the manufacturing sector would have doubled to MYR2,500 (from 1,250). Given NTPM’s foreign workers consist <5% of total headcount, the eventual impact of the impending levy hike is insignificant, at <1% of FY16F earnings.

Forecasts and risks. We maintain our earnings forecast on the back of: i) further visibility on NTPM’s Vietnamese operations unfolding, and ii) the insignificant impact of <1% to earnings by the potential foreign worker levy hike.The key risks are unfavourable changes in raw material prices, execution of its foreign operations in Vietnam and intensifying competition in its personal care segment.

Downgrade to NEUTRAL. While we are buoyant over NTPM’s fundamentals prospects, in particular – resilient demand arising from essential nature of NTPM’s products and its dominant market share – we think that current valuations have caught up. Thus, we downgrade our call to NEUTRAL. We take this opportunity to change our valuation method to DCF from P/E to derive a new MYR0.94 TP. The change in valuation method better reflects the recurring nature of NTPM’s underlying operations and captures the longer-term earnings impact from Vietnam. The implied P/E is at 15.3x 2016F EPS, aligned with its historical P/E mean. It offers reasonable dividend yields of 3.8-4.5% for FY16F-18F.