Period

4Q15/FY15

Actual vs. Expectations

Thong Guan Industries (TGUAN)’s FY15 core net profit (CNP*) of RM34.5m beat expectations, making up 120% of consensus (RM28.7m) and 133% of our forecast (RM25.9) on stronger-than-expected Plastic segment’s margins (FY15A: 6.1% vs FY14A: 4.0%) due to a stronger USD.

Dividends

A final dividend of 9.0 sen was announced for cumulative FY15A DPS of 13.0 sen, well above our 7.4 sen forecast.

This implies a payout ratio of 40% for a solid dividend yield of 4.4%.

Key Results Highlights

YoY, FY15 CNP rose 58% as Plastic segment PBT jumped 91% to RM40.4m on stronger margins as discussed above. F&B segment’s PBT also improved 24% to RM2.8m on strong contribution from tea and curry powder products.

QoQ, 3Q15 CNP increased 74% to RM14.9m as Plastic PBT rose 52% to RM18.4m on better margins (10% vs. 3Q15’s 7.1%). However, F&B PBT slipped into losses (-RM0.3m) on seasonally lower demand.

Outlook

We expect continued top and bottomline growth driven by capacity expansion into higher margin products such as the 33-layer nanotechnology stretch flim line, commissioned in 1Q16, 5-layer blown film line, commissioning in 2Q16, and new Purewrap lines targeted in 2H16, with an estimated capacity of 1.4k MT per line annually.

Change to Forecasts

We raise our FY16E CNP by 12% to RM33.0m reflecting our stronger margin outlook, and introduce our FY17E CNP of RM36.7m (+11% YoY growth).

Rating

Upgrade to OUTPERFORM (from MARKET PERFORM) We are positive on TGUAN’s prospects as a strong USD and continued capacity expansion into highmargin production lines should sustain the Plastic segment’s margins going forward.

Valuation

Upgrade our TP to RM3.40 (previously RM3.07) on unchanged Target PER of 11.0x as we roll forward our valuation base year to FY17E (from FY16E) in line with the sector. Hence, Fwd. EPS is higher at 30.9 sen (from 27.8 sen). Our Target PER is based on a 30% discount to Consumer Packaging PER which incorporates TGUAN’s lower net margins (4.6%) vs. Consumer Packager SLP’s 15.3%.

Risks to Our Call

Volatile plastic resin prices.

Foreign currencies risk.

Lower-than-expected contribution from its Chinabased subsidiaries.

Source: Kenanga Research - 26 Feb 2016