TGUAN’s FY22 results met expectations on a better product mix. Following the recent commissioning of its three new blown film lines, another two nano stretch film lines are on track to commence by 1HFY23. It continues to invest in R&D, including a new Newton R&D centre in Thailand. We maintain our FY23F net profit, TP of RM3.28 and OUTPERFORM call.
Within expectations. FY22 core profit of RM111.3m met expectations. FY22 revenue grew by 14.1% driven by higher sales volume and ASPs for its premium products and food wrap as well as food and beverages products. Net profit improved 22.1% due to better product mix and operational cost efficiency despite the labour shortage situation.
QoQ, 4QFY22 revenue declined by 11% due to weaker sales volume (for conventional stretch film, food wrap, courier bags and food and beverages) on the back of slowdown in the global economy. After adding the forex loss of RM9.2m, core net profit rose 16% driven by better product mix skewed towards higher margin products as gross profit margin improved 1.8ppt.
Outlook. Following the recent commissioning of its three new blown film lines, another two nano stretch film lines are on track to commence by 1HFY23. TGUAN is confident of filling up all these five lines with new orders given the strong demand for such premium products.
Recently, TGUAN also established a new R&D centre in China called ”CargoSafe” to strengthen its visibility and broaden its market presence there and is planning to set up another Newton R&D centre in Thailand. TGUAN believes it will continue to make inroads in the European market, wielding technical tests, data analysis, and certifications as its competitive advantages. TGUAN is also adding mobile test laboratory (truck equipped with testing machines to perform testing for customers) in Mexico and US market, which easier to perform load stability testing at customers’ side.
The demand outlook for the plastic packaging sector in 2023 is not entirely favourable especially in the first half of the year, dampened by slower global economic growth and lingering supply chain disruptions affecting end-users’ operations and hence demand for plastic packaging. However, mitigating these factors are: (i) easing labour shortages, resulting in better productivity and efficiency gains, (ii) improving margins as high-cost resin inventory is depleting, and (iii) declining cost of input resin (see Chart on next page).
Forecasts. We maintain FY23F net profit and introduce our FY24F numbers.
We like TGUAN for: (i) the sweet spot the local plastic packaging industry is currently in, i.e. weakening cost of input resin while selling prices for products are holding up due to production curbs globally, especially in Europe, due to high energy cost or energy supply constraints, (ii) its earnings stability underpinned by a more diversified product portfolio, and (iii) its growth prospects backed by capacity expansion for its premium products (nano stretch films, courier bags, food wraps and some industrial bags (wicketed bags, oil/flour/sugar bags).
Maintain OUTPERFORM with TP of RM3.28 as we maintain our valuation at FY23F PER at 11x, 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).
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 - 1 Mar 2023