Upgrade to HOLD

We expect TOMY to report better earnings growth and EBITDA margin in FY19 on better operational efficiency and lower resin cost. We maintain our financial forecasts for now, pending the release of its 4Q18 results. We roll forward PER valuations to FY20, deriving a revised TP of MYR0.70 (FY20 PER of 22.3x; +1SD to LT mean); upgrade to HOLD.

Operational efficiency to improve

We expect TOMY to report a >100% YoY jump in 4Q18 core net profit to MYR1.2m from a net loss of MYR1.6m in 4Q17 (3Q18: +MYR3.1m, 9M18: +MYR3.4m), on recognition of reinvestment allowance. Going forward, we expect TOMY to demonstrate an improved FY19E EBITDA margin of 12% from 8.5% in FY18E, benefiting from (i) enhanced production efficiency from its new advanced technology, (ii) the realignment of production processes at both its Senai and Tampoi plants and upgrade in system production processes, and (iii) better cost management.

Benefiting from lower resin cost

We expect TOMY’s profit margin to improve further in FY19 due to the downward drift in resin prices since Oct 2018 (Fig. 3-5), having fallen on average 8%-10%. The decline has largely been due to weakening crude oil price and the on-going trade war between the US and China. Our petrochemical industry analyst expects petrochemical prices to remain under pressure this year due to distortions in the global supply-chain. We believe TOMY will net benefit (considering weaker MYR) from the time lag between cheap raw materials and competitive selling prices.

Pegging to a higher PER

We are keeping our FY18E-20E forecasts for now, pending the release of TOMY’s 4Q18 results end of this month. TOMY’s earnings have declined in recent years having been impacted by high start-up and raw material costs. With its relocation plans at tail-end and raw material prices trending down, the worst is over, in our view. With earnings on the rebound, risk-reward has turned balanced. We upgrade the stock to HOLD, with a revised TP of MYR0.70 (FY20 PER of 22.3x; +1SD to LT mean) vs. MYR0.41 previously (FY19 PER of 16.5x; 3-yr average). [Prior:SELL]

Source: Maybank Research - 11 Feb 2019