INVESTMENT MERIT
A re-rating on the card? Scientex’s (“SCIENTX”, TB, FV:
RM2.80) recent proposed acquisition of
two operating companies from GW Plastics Holdings (“GWPLAST”, OP, TP:
RM1.19) at a reasonably good valuation of 11x FY13 PER could spur buying
interest in stocks in the flexible plastic packaging (FPP) sector, especially
on those with undemanding valuations such as Thong Guan (TGUAN).
Decent dividend
yield. While it has no written
dividend policy, the company has been paying an average of 25% dividend payout ratio
since 2007. Based on the 25% payout, its FY12-FY13 NDPS are projected at
6.5-7.0 sen, yielding 5.0%-5.5%. We believe these payouts are achievable given
its manageable capex requirement of RM20.0m for both FY12 and FY13.
Lines expansion to lead growth. We are projecting an annual earnings growth
of c.10% for FY12-FY13E, which will be mainly driven by export sales. As of
end-2011, export sales accounted for >80%
of TGUAN’s revenue. We
expect export sales
to grow c.11% for FY12-FY13 as its 85%-owned
high-quality PVC cling food wrap company, TG Power Wrap, is expected to add two
new production lines, which will double its current food wrap capacity.
Attractive valuation. TGUAN is trading at undemanding PER valuations
of 4.6x over its FY13 earnings as opposed to the other FPP stocks of 6x-11x.
Its low valuation could possibly be due to (i) liquidity issue, (ii) its
relatively smaller market cap and (iii) lower profit margin. However, even if
we take these factors into consideration, the stock should be valued at RM1.57,
implying >20% upside from here, based on a PER 5.5x over its FY13 EPS of 28.5
sen. Trading Buy.
SWOT ANALYSIS
Strength: Strong presence in Japan as the largest
Malaysian garbage bags exporter to the country, which implicitly indicates that
the quality of TGUAN’s plastic products is somewhat assured.
Weaknesses: Slower than expected sales growth from its
F&B division this will affect the group’s earnings.
Opportunities: Growing demand trend for high-quality PVC
food wrapper.
Threats: Gloomy
economic condition that could directly hit the plastic packaging industry
outlook.
TECHNICALS
Resistance:
RM1.43 (R1), RM1.47 (R2)
Support: RM1.28
(S1), RM1.19 (S2)
Comments: Though
on an overall downtrend, TGUAN appears to have formed a short term bottom at
RM1.28 amid technical indicators that are slowly improving. From here, the
share price is likely to continue in consolidation mode, and any rebound is
likely to be capped at RM1.38.
BUSINESS OVERVIEW
TGUAN was established in 1940s, from a small family business
which was in tea and coffee trading, under the brand name of “888”, TGUAN
forayed into plastic manufacturing in the 1960s. Since then, it has become one
of the largest producers of cast pallet stretch film in Asia Pacific with an
annual combined production output of more than 100,000 metric tons. More than 75%
of its products are exported across oversea and Japan is its biggest export
market, which contributes 35% of the group’s revenue.
BUSINESS SEGMENTS
Plastic Products.
This is the core business of TGUAN, which consistently contributes 94% to the
group’s turnover. Its cast stretch film production line is equipped with the
technology to produce stretch film with a strong and thin structure, where no
pre-stretching is needed. In terms of production ratio, cast film makes up 60% of output with the
remaining 40% being blown film.
Food and Beverages. Through its subsidiary, TGUAN’s tea and
coffee business remains intact within the company’s growth. The company
purchases high quality tea leaves and coffee beans from China and Indonesia
respectively.
Source: Kenanga
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