TGUAN guided for better margins ahead as it has cleared its high-cost inventory. The order backlog of its stretch film has recovered to  c.80% of the peak in FY22, indicating that the demand decline may have bottomed out. In Europe where it has made significant inroads with secured orders, it believed it has made further progress after participating in an international trade fair there. We maintain our forecasts, TP of RM3.22 and OUTPERFORM call.

We came away from an engagement with TGUAN yesterday feeling encouraged despite a challenging operating condition. The key takeaways  are as follows:

1. TGUAN guided for better margins ahead as it has cleared its high-cost inventory and that the weak 1QFY23 performance was largely due to high raw material cost.

2. The order backlog of its stretch film has recovered to c.80% of the peak in FY22, after a 50% drop in 4QFY22, indicating that the demand decline may have bottomed out.

3. TGUAN has also made significant inroads in overseas markets,  especially in Europe where it has secured orders from brand owners that will translate to better ASP and hence margins. It impressed potential MNC customers with its mobile testing truck and nano stretch film in a recent international trade fair in Europe.

4. TGUAN is adding a new leased warehouse in the US (in addition to the existing two it already operates) to effect just-in-time delivery services. It is targeting a new customer in the beverages sector with this new capacity.

5. The commissioning of its 10thnano stretch film line has been pushed back to 2HFY23 (from 2QCY23) while its 9thnano stretch film line is the midst of installation. Meanwhile, its two new blown film lines (4th and 5th) are on track to be operational by end-FY23.

Forecasts. Maintained.

We also maintain our TP of RM3.22 based on 11x FY24F PER, at a  discount to the sector’s average historical forward PER of 13x to reflect  TGUAN’s low share liquidity. There is no adjustment to our TP based on  ESG given a 3-star rating as appraised by us (see Page 4).

We continue to like TGUAN for: (i) the growth potential of the local plastic packaging sector as Malaysian players like TGUAN are gaining market shares from overseas producers that are losing their competitiveness due to the rising production cost, (ii) TGUAN’s earnings stability underpinned by a more diversified product portfolio and building up solid clientele base,  and (iii) its expansion plans for premium products (nano stretch films,  courier bags, food wraps and some industrial bags (wicketed bags,  oil/flour/sugar bags). Maintain OUTPERFORM.

Risks to our call include: (i) sustained higher resin cost, (ii) the demand for packaging materials hurt by a global recession, and (iii) prolonged labour shortages.

Source: Kenanga Research - 24 May 2023