GW Plastics - Greater upside

We attended the company’s analyst briefing and came back with the continuing belief that the company will benefit from a stabilising plastic resin price due to the gradual  increase in the supply of new petrochemical capacities and its timely capacity expansion, which will be able to capture the rising demand for both its blown and cast films. This was shown in 1H12 results, where the PBT jumped by 27.4% YoY on the back of greater volume (+14.7% YoY). Due to our crude oil estimate adjustments, we have revised our FY12-13 earnings forecast by +1.5% and -16.7% respectively to RM26.0m and RM29.4m. Despite  lowering our earnings estimate for FY13, we have raised our  target price from RM0.86 to RM0.92 after rolling over our valuation base year to FY13 and with a new targeted PER of 8.2x (from 8.0x previously). Coupled with the dividend yield of 7.4%, the stock offers a total return of 16.3%. OUTPERFORM maintained. 

Greater volumes, better economies of scales. To recap, 1H12 earnings of RM11.4m was in line, making up 44.5% of our forecast of RM25.7m. This is because 1H is seasonally slower as compared with the 2H of the year (1H11 NP of RM8.7m contributed 44.7% of FY11 full year earnings of RM19.6m). The robust 11.2% YoY sales growth in 1H12 was mainly driven by higher volumes from both blown (+15.0% YoY) and cast films (+14.4% YoY), which has offset the lower average selling price (-3.0% YoY, “ASP”). Thus, a higher PBT margin was achieved on the back of better economies of scales.

Expansion continues. The company’s strategy is to continue its capacity expansion to enjoy a boom time ahead in profits through the volume game and by riding on lower raw material prices with the oncoming supply of new petrochemical capacities (which is expected to come on-stream next year). With the potential overcapacities, we foresee its raw material cost to at least stabilise in the coming years. This implies that the management would find it easier to maintain or improve its margin. A new cast film machine is actually in the pipeline and is expected to be commissioned in 3Q13 to increase its existing cast film capacities by 30% to about 34k tonnes.   

Lower oil price estimate translates into lower earnings for FY13. Post-2Q12 results update, we have revised our FY12-13 earnings forecasts by +1.5% and -16.7% respectively to RM26.0m and RM29.4m after finetuning and imputed new set of crude oil, ASP and plastic resin prices. A significant change was seen in FY13 earnings mainly due to a 10.4% cut in our in-house crude oil estimates to USD95 per barrel (from the previous assumption of USD106 per barrel). 

Higher dividend payout? Despite lowering our FY13 earnings forecast, we have raised our payout ratio from the minimum policy of 40% to 50% as we reckon that the management now has the intention to pay a higher dividend YoY in absolute term. Thus, we expect the company to distribute a NDPS of 5.5 sen and 6.2 sen for FY12-13, which translate into an attractive dividend yield of 6.5%-7.4%, respectively.   

Raising TP, maintained rating. As we have rolled over our valuation base year to FY13 and revised the TP to RM0.92 (from RM0.86 previously) based on 2-year average PER of 8.2x (from 8.0x PER  previously). We believe a 8.2x PER is fair as the weighted industry forward PER stands at 8.0x.  Coupled with the dividend yield of 7.4%, the stock offers a total return of 16.3%. Hence, our OUTPERFORM rating is maintained.     

Source: Kenanga