TGUAN pencilled in revenue growth of 9% QoQ in 3QFY24 despite its USD-denominated sales, propelling 9MFY24 revenue by 6% YoY on the back of stronger sales from the F&B divisions and plastic packaging. TGUAN also remains poised to grow in Europe and US in the longer term, thanks to product innovation.

However, 9MFY24 bottom line fell short of expectations due to some unfavourable forex, that could reverse in coming quarters, and cost pressures. On cost pressure, we trim our FY24F and FY25F earnings by 5% and 8%, respectively, and TP by 9% to RM2.58 (from RM2.80) but maintain OUTPERFORM call.

TGUAN's 9MFY24 core net profit of RM58m missed our expectation at 62% of our full-year forecast and 66% of the full-year consensus estimate. The key variance against our forecast stemmed from: (i) higher-than-expected cost pressures, (ii) lower ASP, and (iii) forex losses. However, 9MFY24 revenue grew 6% YoY on better sales from the F&B division, notably sale of coffee and tea and other consumable products. The F&B division grew 20% YoY, driven by (i) increased sales as consumers shifted toward local coffee and tea products, (ii) lower average raw material cost as the MYR strengthened, and (iii) higher selling price. No dividend was declared for the third quarter.

QoQ, 3QFY24 turnover increase 9%, driven by increase sales volume from both plastic and F&B divisions. Plastic sales growth was mainly driven by stretch films, industrial bags and films, courier bags and garbage bags. However, its core net profit fell by 30%, due to lower ASP in the plastic division and the strengthening of MYR.

Outlook. Amid expectations of flat global market demand due to prolonged inflation in advanced economies and ongoing geopolitical tensions, TGUAN remains steadfast in pursuing growth through innovation and market expansion. The company recently participated in the Pack Expo in Chicago, USA, and the Scan Pack Expo in Sweden, showcasing their innovative stretch film technology designed to optimize packaging for sustainability and cost efficiency for the users. These efforts are part of TGUAN's strategy to penetrate deeper into the European and US markets. We believe TGUAN can expand its market share through cutting-edge technology and proactive marketing, R&D and mobile load stability testing capabilities to provide assurance to new buyers.

Although currency swings can affect TGUAN margins, especially in the short term, the impact is more muted over time. TGUAN generates over 80% of its revenue from USD-denominated exports. However, its biggest production cost item is resins, which is largely traded in USD as well, thus provides a natural hedge in the longer term. Additionally, the company's focus on high-margin products like nano stretch film has led to improving margins which should further insulate TGUAN from smaller currency fluctuations. TGUAN has also ventured into developing commercial properties which should enhance medium- term earnings even though it is not expected to have substantial impact on annual earnings as overall project GDV of RM200m- RM300m is not very large and the project is expected to be stretched over three to five years.

Forecasts. We cut our FY24F and FY25F earnings by 5% and 8%, respectively, to reflect higher cost pressures.

Valuations. We cut our TP to RM2.58 (from RM2.80) based on unchanged 11x FY25F 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).

Investment case. We continue to like TGUAN due to: (i) the growth potential from exports as more competitive local players, such as TGUAN, gain market shares from overseas producers, (ii) its aggressive push into Europe and US markets with environmentally-friendly, high-performing products, and (iii) its expansion plans for premium products, such as nano stretch films, food wraps and some industrial bags (wicketed bread bags, oil/flour/sugar bags). We believe the recent drop in its share price is also due to investors' concern on volume growth. However, innovative initiatives by TGUAN may act as a re-rating catalyst as soon as it successfully gains more market share in the advanced economies. Maintain OUTPERFORM.

Risks to our call include: (i) a sudden spike in resin costs, (ii) weak demand for packaging materials on a global recession, and (iii) supply chain disruptions.

Source: Kenanga Research - 21 Nov 2024