• Switch to TAKE PROFIT from Buy with new DCF-derived MYR0.50 TP from MYR0.52, 7% downside. 2QFY20 earnings missed as the kick-in of the lower raw material price impact lagged vs our optimistic expectation. We understand that the full impact would only be reflected in 4QFY20. Meanwhile, NTPM has completed its capacity expansion plan in the Malaysia and Vietnam plants. The ramp-up in production should contribute to topline growth progressively.
• Results below expectations. NTPM reported 2QFY20 (Apr) core net loss of MYR1.4m (vs core net profit of MYR3.6m and MYR0.5m in 2QFY19 and 1QFY20 respectively), bringing 1HFY20 net loss to MYR0.9m. The negative variance could be attributed to the later-than-expected kick-in of lower raw material (ie. virgin pulp and waste paper) price impact vs our optimistic expectation. Earnings weakness were mainly caused by higher depreciation and interest expense charges in relation to capacity expansion, particularly in Vietnam. The capacity expansion has contributed to sales growth of 9.2% YoY and 5% QoQ to MYR194.2m in 2QFY20, and we believe sales growth will accelerate in view of the ramp-up in utilisation rate. Post results, we cut our earnings by 53%, 19%, 17% for FY20F-22F to impute a more realistic lag time and more conservative assumption of the Vietnam plant’s utilisation rate.

• Lower raw material costs should be reflected in the financials ahead progressively, with the full impact expected to be seen in 4QFY20 (vs 3QFY20 – which was our previous expectation). Long fibre pulp prices (Bloomberg ticker: CEFWPULP Index) remain low with YTD-FY20 average price now at MYR2,585/tonne vs YTD-FY19 of MYR3,692/tonne.

• Capacity expansion completed. NTPM’s second of the two new lines at the Vietnam plant has commenced operations in October, and should start to contribute in 3QFY20. As at 2QFY20, we gather the Vietnam operations were running at c.25% utilisation rate (based on 50,000 tonne pa capacity) and management is targeting 55% utilisation rate by end-FY20F. To recap, NTPM has installed two new production lines in Vietnam, bringing total capacity to 50,000 tonnes pa from 10,000 tonnes. This is in line with management’s strategy to lift economies of scale in order to be competitive in Vietnam.

• Forecasts and key risks. Key risks to our call and TP are the sudden jump in raw material costs, and the company underutilising the new capacity.

• We switch our recommendation to TAKE PROFIT following a 29% run-up in share price since 27 Jun 2019, and we also expect share price to react negatively to the results. Fundamentally, we highlight earnings growth prospects remain positive as the normalisation in raw material costs should translate into sharp earnings recovery, while ramp-up in capacity utilisation and improvement in operating leverage should spark earnings turnaround in Vietnam. Correspondingly, to the earnings cut, we trim our DCF-derived (WACC: 6.6%, TG: 1%) TP to MYR0.50, implying 19x FY21F P/E – close to its 5-year average forward P/E of 21x.

Source: RHB Securities Research - 23 Dec 2019