The slump in crude oil prices — and therefore lower resin raw material costs — coupled with the weakening ringgit are expected to be a boon for Thong Guan, a major exporter of plastic packaging products.

The company is one of Asia Pacific’s largest producers of plastic packaging, including thin stretch film, garbage bags, PVC food wraps and industrial films. Export — to Japan, Australia, China and ASEAN — accounted for nearly three-quarters of sales in 2013.

From 2010 to 2013, the company recorded double-digit growth in sales every year, from RM489 million to RM720 million. Pre-tax profit rose from RM22.7 million to RM31.8 million during the same period.

The recent strengthening of the US dollar will translate into higher sales and profit margins for Thong Guan.

To cater to future demand growth, it has committed to spend RM100 million to expand capacity for various product lines, focusing on high margin segments. Annual production capacity is slated to rise by 42% to 170,000 tonnes within the next three years. Currently, Thong Guan is running at 90% utilization rate.

It has a solid balance sheet with net cash position at end-Sept 2014. Coupled with steady operating cashflow, funding for expansion should not be an issue. Furthermore, in September 2014, Thong Guan successfully raised RM52.6 million by issuing irredeemable convertible unsecured loan stock (ICULS) to part-finance its expansion plan.

The Edge Research rates Thong Guan an above-average Fundamental Score of 2.1 and Valuation Score of 1.8 out of a maximum 3.0.

Valuations are attractive. The stock is trading at a steep 25% discount to its book value of RM2.87. Trailing 12-month P/E is only 8.1 times — low relative to its prospective growth. Dividends were raised from 6 sen in 2011 to 8 sen per share in 2013, translating into attractive net yield of 3.7%.

This article first appeared in The Edge Financial Daily, on January 21, 2015.

http://www.theedgemarkets.com/my/article/insider-asia%E2%80%99s-stock-day-thong-guan-industries-0