Tomypak Berhad - Re-rating is in the cards?

INVESTMENT MERIT

• Recent development. Scientex Bhd (“SB”, TB, FV: RM2.80) has proposed to acquire two operating companies from GW Plastics Holdings (“GWPH”, OP, TP: RM1.19) at reasonably good valuation of 11x FY13 PER, could spur investment interest in the flexible packaging sector especially stocks with undemanding valuation such as Tomypak.

• 1H12 results review. The group achieved a turnover of RM108.1m and PBT of RM12.1m in the first 6 months of the year in contrast to RM106.1m and RM6.3m respectively last year. Based on the group’s result announcement to Bursa Securities, the slight increase of 1.8% in revenue was driven by domestic sales. However, the group managed to almost doubled its PBT due to a better sales mix and lower raw material cost, leading to better profit margins (1H12: 11.2% vs. 1H11: 5.9%).

• Looking ahead, while the operating environment is expected to remain highly competitive due to the uncertainties in the  global economy, the demand for Tomypak’s products is expected to remain strong as the group’s customers are mainly (~90%) from the F&B sector, which is recessionresilient in nature. We understand that Tomypak sees its further organic growth from its existing major MNC customers locally and in the region (note that almost half of Tomypak’s revenue is from the export market, mainly from South-East Asia). 

• A good dividend paymaster. While there is no written dividend policy, the stock has been paying out decent dividends thus far. In fact, the group has been paying dividends on a quarterly basis since 2009 and has increased its dividend payout ratio from ~25% to ~55%. The stock has announced a total 3.5 sen tax exempted interim dividend for its 1H results, representing a 42.5% payout. 

• Earnings and dividend estimates. Should Tomypak maintain this payout ratio, we project FY12 and FY13 NDPS at 6.9 sen and 7.9 sen respectively, implying net dividend yields of 6.2% and 7.1% respectively. These projections are on the back of our FY12 and FY13 EPS projections of 16.1 sen and 18.6 sen respectively.

• View and valuation. The stock is trading at undemanding PER valuations of 6.9x and 6.0x over its FY12 and FY13 EPS as opposed to Daibochi Plastics & Packaging’s 12.2x and 10.7x. While this could be due to (i) liquidity issue and (ii) gap in their market caps, the significant discount of 43% is unjustifiable. In fact, the valuations are lower than small cap historical and forward PERs of 13x and 7x respectively. Should we peg our FY13 EPS over the small cap forward PER of 7x, the stock should be valued at RM1.30, at least, implying a 17% upside from here. Trading Buy.

SWOT ANALYSIS

• Strength: Continuously improve productivity, operational efficiency and quality of flexible packaging material by new techonolgy and skills

• Weaknesses: Earnings profile can be volatility. 

• Opportunities:  (i) Venture into new market particularly F&B industry in emerging market like Vietnam and Indonesia. (ii) There are still boundless new opportunities available, particularly in the emerging markets where the demand for flexible packaging will increase if the  food and beverage packaging standards in these markets improve. (iii) Potential benefit from corporate exercises (i.e. M&As, etc) judging from the recent trend.

• Threats: High oil price volatility may hit the company’s earnings.

TECHNICALS

• Resistance: RM1.16 (R1), RM1.22 (R2)

• Support: RM1.06 (S1), RM1.00 (S2)

• Comments: Tomypak tested the RM1.16 resistance level without avail, and has since surrendered some gains towards yesterday’s closing of RM1.10. The share price is likely to continue its retreat towards the RM1.06 support where we expect bargain hunting activities to pick up. 

THE COMPANY

Tomypak Berhad is one of the leading coverter for flexbile food packaging materials in Malaysia. It is established in 1979 and listed on Main Market of Bursa Malaysia in 1996. Through its subsidiaries, the Company manufactures  and trades plastic packaging materials, polyethylene, polypropylene films and sheets, and thermoforming sheets. Tomypak is located at Tampoi, Johor Bahru.

THE BUSINESS

• Through its core subsidiary, Tomypak Berhad, plastic packaging materials are supplied to local and foreign manufacturers involved in food products and additives, cosmetics and toiletries, and pharmaceutical and prophylactics sectors. 90% of their products are distributed to food and beverage industry. Nestle, Kraft, Hup Seng, Mamee, Apollo Food, are the Group’s key customers which contribute about 70% of its revenue.

• Product range of Tomypak can be clssified into high barrier packaging material for high barrier vacuum matellized laminates through plasma technology, snack food packaging, instant noodles, confectionary, seasoning, household products and pet food packaging.

• Wide array of manufacturing machines are used to produce thier packaging material. Gabure printing machine is used for achieving superior and consistency. To ensure printing quality, camera inspection machine is applied to detect printing defects. Other various types of machines like high  speed solventbase lamination machine, solventless lamination machine andextrusion lamination machine are used to produce quality packaging material.  

Source: Kenanga