TGUAN (7034) :Thong Guan Industries - Feeling Japan’s blues
Target RM3.06 (Stock Rating: ADD)
With annualised 9MFY14 net profit coming in at 86.4% of our full-year forecast, Thong Guan’s (TGI) 3Q14 results were below our and market expectations mainly due to slower revenue from Japan. We cut our FY14-16 EPS by 8-14% to reflect likely weaker sales from Japan. However, with the year-end ahead, we roll over to CY16 EPS and our target price rises to RM3.06 (based on an unchanged 30% discount to fully-diluted SOP/share). Potential re-rating catalysts for the stock are EBITDA margin recovery and regional M&A developments. Maintain Add.
9MFY14 net profit down 0.5% yoy
9MFY14 revenue rose 5.6% yoy but net profit dipped 0.5% yoy to RM21.7m. No interim DPS was declared, in line with our expectations. Revenue from Japan was below expectations in the current quarter as Japanese suppliers stocked ahead of a 5% to 8% sales tax increase in Apr 2015. The Japan government was supposed to raise sales tax to 10% in Oct 2014 but deferred this move as the country recently fell back into recession. This affected the sales of TGI’s products, like garbage bags and stretch films, to Japan. TGI has plants both domestically and in China. However, TGI’s management has indicated that earlier restocking supplies have run low and orders have recovered strongly since Oct. The company is confident orders should continue to recover in Nov/Dec this quarter.
Capacity expansion to drive earnings growth
The company is in a major expansion phase, planning to invest around RM100m over the next three years. Overall group production capacity is expected to rise 40% to 170,000 tonnes by 2016. Capacity expansion is focused mainly on the thin stretched films and the PVC food wrap.
Funds from ICULS in since Oct
Funding for this capex is mainly coming from the RM52.6m ICULS (just completed in Oct 2014) and operational cash flow, which is above RM40m annually. In 2015, the company will expand its PVC food wrap capacity to 9,000 tonnes annually and this product, together with the new nano-layer stretch film product, should be TGI’s main earnings contributor from 2015 onwards.
Source: CIMB Daybreak - 24 November 2014
Target RM3.06 (Stock Rating: ADD)
With annualised 9MFY14 net profit coming in at 86.4% of our full-year forecast, Thong Guan’s (TGI) 3Q14 results were below our and market expectations mainly due to slower revenue from Japan. We cut our FY14-16 EPS by 8-14% to reflect likely weaker sales from Japan. However, with the year-end ahead, we roll over to CY16 EPS and our target price rises to RM3.06 (based on an unchanged 30% discount to fully-diluted SOP/share). Potential re-rating catalysts for the stock are EBITDA margin recovery and regional M&A developments. Maintain Add.
9MFY14 net profit down 0.5% yoy
9MFY14 revenue rose 5.6% yoy but net profit dipped 0.5% yoy to RM21.7m. No interim DPS was declared, in line with our expectations. Revenue from Japan was below expectations in the current quarter as Japanese suppliers stocked ahead of a 5% to 8% sales tax increase in Apr 2015. The Japan government was supposed to raise sales tax to 10% in Oct 2014 but deferred this move as the country recently fell back into recession. This affected the sales of TGI’s products, like garbage bags and stretch films, to Japan. TGI has plants both domestically and in China. However, TGI’s management has indicated that earlier restocking supplies have run low and orders have recovered strongly since Oct. The company is confident orders should continue to recover in Nov/Dec this quarter.
Capacity expansion to drive earnings growth
The company is in a major expansion phase, planning to invest around RM100m over the next three years. Overall group production capacity is expected to rise 40% to 170,000 tonnes by 2016. Capacity expansion is focused mainly on the thin stretched films and the PVC food wrap.
Funds from ICULS in since Oct
Funding for this capex is mainly coming from the RM52.6m ICULS (just completed in Oct 2014) and operational cash flow, which is above RM40m annually. In 2015, the company will expand its PVC food wrap capacity to 9,000 tonnes annually and this product, together with the new nano-layer stretch film product, should be TGI’s main earnings contributor from 2015 onwards.
Source: CIMB Daybreak - 24 November 2014
