TGUAN is disposing of its entire F&B segment for RM60m cash to a major shareholder in a related party deal, allowing it to unlock value. We think this move will allow TGUAN to strengthen its focus on high-margin plastic products and expansion in Indonesia and is mostly strategic in nature. We are only overall neutral on this deal given the sale valuation of 9x PER (being midway between our 11x target PER for TGUAN and TGUAN current market traded PER of 6- 8x). As the sale is subject to shareholders' approval at an EGM, we have at this juncture not flowed through any changes into earnings forecasts and maintain our TP of RM2.58 and OUTPERFORM call.

The key takeaways are as follows:

1. Selling Its F&B business to a major shareholder. Thong Guan Industries Berhad (TGUAN) has announced a proposed disposal of its entire equity interest in Syarikat Thong Guan Trading SdnBhd (STGT) including its subsidiaries for a total cash consideration of RM60m. The buyer, Foremost Equals Sdn Bhd (FESB), is a major shareholder of TGUAN with a 37.03% direct stake. This transaction is classified as a related-party transaction under Bursa Malaysia's Main Market Listing Requirements due to overlapping interests. Notably, key directors and shareholders of TGUAN, including Dato' Ang Poon Chuan, Dato' Ang Poon Khim, and Datuk Ang Poon Seong, hold significant direct and indirect interests in FESB. An independent adviser has been engaged to ensure fairness and transparency for non-interested shareholders.
2. Disposal for RM60m cash. The transaction involves a total cash consideration of RM60m, with an upfront deposit of RM6m upon signing the share sale agreement (SSA) and the balance of RM54m payable upon completion. Expected to be completed is in 1QCY25, the sale is subject to shareholder and regulatory approvals. The cash settlement eliminates uncertainties associated with deferred payments and enhances the financial certainty for TGUAN.
3. Valuation. The disposal consideration of RM60m was evaluated by FHMH Corporate Advisory, which adopted two valuation methodologies: - Relative Valuation Approach (RVA): This method compared STGT to similar companies on Bursa Malaysia and derived a fair market value range of RM58.17m to RM66.48m. The valuation factored in a 20%-30% discount for marketability since STGT is a private entity. - Revalued Net Asset Valuation (RNAV): This method assessed the adjusted net asset value of STGT, factoring in asset revaluations, and arrived at a lower valuation of RM40.83m. At RM60m, the price lies within the RVA range and represents a 46.95% premium over the RNAV. Additionally, the disposal is priced at 9.39x STGT's trailing price-to-earnings (PE) ratio, below the average PE of 13x for listed food and beverage peers. The pricing appears fair and reasonable, considering STGT's modest revenue contribution of 5.24% and profit after tax (PAT) contribution of 6.97% to the group in FY23.
4. Potential benefits to TGUAN. The disposal is expected to bring several positive financial and strategic benefits to TGUAN. A portion of the proceeds, RM30m, will be distributed as a special dividend of RM0.07 per share, enhancing immediate shareholder value. Another RM29.2m will be allocated to working capital, supporting raw material purchases and staff costs while reducing reliance on external financing. Strategically, the disposal allows TGUAN to exit the F&B segment, which has been a minor contributor to its overall performance, and concentrate on its core plastic products segment, which accounted for 90% of revenue and 101% of profit in FY23. Additionally, the funds may support TGUAN's expansion plans in Indonesia, strengthening its position in the regional market.

From a strategic perspective, this disposal aligns with TGUAN's long-term focus on the plastic packaging. The F&B segment, though profitable, was a legacy business of the Ang family and has been a relatively minor contributor which is now being monetized. The one-off gain of RM15.43m enhances TGUAN's net asset base, while the cash proceeds improve financial flexibility. The decision to channel part of the proceeds as a special dividend provides immediate value to shareholders, while the remainder ensures the group is well-positioned for future growth. In our view, the disposal is a prudent move, balancing short-term shareholder returns with long-term strategic benefits.

Forecasts. Maintained.

Valuations. Maintained at RM2.58 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 5).

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 share 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 (wicketedbread 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. Reiterate OUTPERFORM.

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

Source: Kenanga Research - 22 Nov 2024