• Downgrade to SELL from Neutral, new TP of MYR0.35 from MYR0.41, 19% downside. NTPM’s 1QFY23 (Apr) results disappointed, with the sharp hike in product costs unable to be fully passed on. We turn more cautious on the stock – considering the elevated production costs on the back of volatile raw material prices, heightened competition, and the sluggish growth in export sales. Even after taking into account a gradual earnings recovery, we believe there is still downside from its current valuation.

• NTPM’s 1QFY23 results are below expectations. Net profit of MYR1.1m (-93% YoY) significantly underperformed our previous FY23F earnings of MYR28m, on the sharper-than-expected spike in costs which were unable to be passed on fully, given the competitive market conditions. Post results, we cut FY23-25F earnings by 48%, 11% and 2%. Correspondingly, our TP drops to MYR0.35 (inclusive of a 2% ESG premium), implying 13x P/E FY24F (below the stock’s 5-year mean) to factor in the challenging outlook.

• Results review. YoY, 1QFY23 revenue jumped 25% to MYR217m on the ASP increase and volume recovery in away-from-home channels. However, the price increases were insufficient to offset the incremental costs arising from the higher raw material and energy costs. That led to a 86% slump in 1QFY23 PBT to MYR2.8m, with the margin eroding sharply to 1.3% from 11.3%. QoQ, 1QFY23 revenue was 8% higher as a result of the higher ASPs. Similarly, the costs surged faster than the upward ASP adjustments and this, together with the FX loss from the weakening of the MYR, dragged 1QFY23 net profit down by 69%.

• Outlook. Earnings pressure should persist in 2QFY23, in view of the elevated raw material and energy costs but the cost pass-through will be gradual – NTPM will implement further price increases and the effects should be reflected in 2HFY23F numbers. Essentially, we are negatively surprised by the margin erosion on cost absorption despite tissue paper being an essential consumer products and NTPM’s position as a market leader in Malaysia. This is as major competitors not following suit with NTPM’s price increases, likely due to the aim to gain market share. Such competition landscape in turn exposes NTPM to higher earnings risks should raw material prices or other costs spike up further in the future. That said, management foresees the raw material prices and some of the cost pressure to ease towards the end-2023.

• Risks to our recommendation include a sharper-than-expected hike/dip in commodity prices, and drastic gain/loss in market share.

Source: RHB Research - 26 Sep 2022