GW Plastics - OUTPERFORM - 11 JUNE 2012

We are maintaining OUTPERFORM on GW Plastics Holdings Bhd (GWPB) with a target price of RM0.86. GWPB is likely Malaysia’s biggest producer of flexible plastic packaging. It  has now further extended downstream into lamination converting services, which could potentially enhance its profits if the company chooses to expand aggressively in this segment. That said, we  expect the contribution to be small at this juncture due to the still small capacity of this segment as compared to the core blown film segment. In any case, GWPB’s earnings are primed to rise from two catalysts ahead going forward; the lower plastic resin price cycle and its timely production capacity expansion  to cater to higher demands, which are already visible in its recent strong 1Q12 results. Hence, we maintain our FY12E (+31% YoY) - FY13E (+37% YoY) earnings. Coupled with an attractive net dividend yield of 6.2%, the unchanged TP of RM0.86 (based on the 4-year Industry Average PER of 8.0x over its FY12 EPS of 10.8 sen) now offers a 28% total return. Reiterate OUTPERFORM.    

Downstream extension into lamination. GWPB has now further extended downstream into lamination. It has invested RM2-3m for a new laminating machine, which provided a higher quality and healthier flexible packaging compared with its other local competitors. Although the lamination operation is targeted to commence in 3Q12, we expect the contribution to remain small at this juncture as the capacity is only 5-10% that of its core blown film segment. In addition, we reckon the margin enhancement arising from its lamination conversion  services will only be significant if the company is able to secure more sales, as well as, increase its capacity further.  

Greater volume play. With the robust combination of lower raw material price and capacity expansion, the company has started to benefit from these two factors despite seeing lower selling prices. For instance, in 1Q12, the impact of lower selling prices (estimated to have fallen 5-6% YoY) was mitigated by the substantial increase in volumes for both its blown and cast films (up by 13% and 30% YoY respectively). As a result, the quarter’s PBT margin still showed an improvement by 0.9 ppt YoY due mainly to better economies of scale from higher production levels. In addition, we believe that the company will continue to benefit from a lower plastic resin price cycle due to the gradual increase in the supply of  new petrochemical capacities.  Together with its timely capacity expansion, which has captured the rising demands for both its blown and cast films, GWPB’s earnings are poised to jump ahead over the next two years given our FY12-13E earnings growth of 31%-37%. There are no changes to our earnings estimates. 

Attractive yields. Although GWPB has adopted a 40% minimum earnings payout, its payout had actually exceeded the amount as it generously distributed 60% of its PAT in FY11. Based on our FY12E net profit of RM25.6m, we are conservatively estimating NDPS of 4.4 sen (40% payout ratio), which translates into an attractive net dividend yield of 6.2%. Assuming similar FY11 payout, net yields could be as rich as 9.3%.  Reiterate OUTPERFORM. Together with its attractive net dividend yield of 6.2%, the stock offers a strong total return of 28% to our unchanged TP of RM0.86, which is based on the 4-year industry average PER of 8.0x over its FY12 EPS. We continue to see strong upside catalysts for the share price on the back of lower plastic resin price and its timely production capacity expansion to cater higher demands.   

Source: Kenanga