After a con-call with management, we came away feeling optimistic about FY21 as business remains busy (>80% utilization, save for PVC at c.60%) and order visibility is longer than usual (2m vs. 1m) on the back of lower resin prices (-5%) since its recent peak in December 2020. Going forward, the continued growth of their high-margin products will help sustain CNP margins of 7-8% in FY20-21. Lower FY20E CNP by 2.3%, while FY21 remains unchanged. A 25% share price correction since Nov-2020 implies an attractive 11x PER. Reiterate OP on unchanged TP of RM3.25 on 14.5x PER.

Prudent management of resin costs and forex risk. While resin costs have risen since bottoming in May 2020 (LDPE: +81%, LLDPE: +47%, HDPE: +48%), the spot prices do not directly translate into TGUAN’s cost as they have been managing resin costs prudently: (i) taking delivery of old orders of LLDPE at USD860/MT (vs. spot price of USD1,030/MT) from the U.S. and LDPE at USD1,000/MT (vs. spot price of USD1,230/MT) from the Middle East, (ii) altering the resin composition of its products to achieve favourable costs, (iii) procuring from the spot market only whatever is necessary. (refer overleaf)

Busy start to FY21. The Group’s stretch films (SF) (both conventional & premium) and garbage bags are seeing greater orderbook visibility of up to 2 months compared to the usual 1 month as local and European customers are buying more SF as they expand, while Japanese customers are stocking up on garbage bags to avoid shortages during the Chinese New Year holiday. Additionally, the courier bag business continues to fare well. (refer overleaf)

Elevated margins moving forward. We believe that the growing segments of premium-SF and courier bags augurs well for TGUAN as they continue transforming into a value-driven business. In the preceding quarters prior to the multi-year low resin prices in 2QCY20, TGUAN has consistently grown their margins. Although 4Q20 CNP margins (est.7%) may not be as attractive as 2Q/3Q20 (8%), we believe that moving forward, the more premium-product mix can help the group sustain GP margins of at least 16% and CNP margins of 7-8%.

Decrease FY20E CNP by 2.3% to reflect a weaker 4QFY20. Maintain FY21E CNP at RM85.2m. We are revising our FY20E CNP down by 2.3% from RM76.7m to RM74.9m to reflect a marginally weaker 4QFY20 QoQ, on a less favourable cost environment in 4QFY20 as LLDPE (70-80% of TGUAN’s total resin consumption) prices rose 25% in 4QFY20.

Maintain OUTPERFORM with unchanged TP of RM3.25 on an ascribed PER of 14.5x to FY21E FD EPS of 22.4sen. We believe that the multiple of 14.5x is justified as: (i) its courier bag segment, which fetches GP margins of c.20% vs Group GP margin of 17%, is poised for growth as it serves blue-chip e-commerce customers in the US, (ii) its size and economies of scale allows it to absorb cost-pressures, and (iii) its healthy balance sheet and strong net cash position of RM120m support their implicit dividend pay-out ratio of 20-25%. Our FY21E DPS is 5.3sen, implying a dividend yield of 2.2%. The current price of RM2.44 implies a forward PER of 11x, which is below its 5-year historical mean of 12x and our ascribed 14.5x.

Risks to our call include: (i) Higher-than-expected resin prices, (ii) volatile foreign currency fluctuations, and (iii) lower-than-expected orderbook.

Source: Kenanga Research - 15 Jan 2021