TGUAN (7034) - Thong Guan Industries - Hit by provisions
Target RM3.06 (Stock Rating: ADD)
At only 62% of our forecast, Thong Guan’s FY14 net profit was below our and market expectations, mainly due to higher bad debt provision and forex losses in 4Q. However, we maintain our FY15-16 EPS forecasts, as we expect the company to benefit from the weaker Ringgit. We also introduce our FY17 EPS forecast. Our target price remains unchanged at RM3.06, based on 30% discount to fully-diluted SOP. Potential re-rating catalysts for the stock are EBITDA margin recovery and regional M&A developments. The stock remains an Add.
FY14 net profit down 37.9%
Thong Guan’s FY14 revenue was up 1.7% yoy but net profit was down 37.9%. The lower FY14 net profit was mainly due the RM5m bad debt provision and RM4m forex losses in 4Q due to the depreciation of the Ringgit against the US$ during the quarter. The company declared final DPS of 4 sen, bringing total FY14 DPS declared to 7 sen, below our 9 sen forecast.
Moving up the value chain
The Ringgit’s weakness against the US$ benefits Thong Guan in terms of cheaper labour and electricity costs compared to most of its global competitors. The company allocated RM100m capex (3-year programme that started in 2014) to boost group production capacity by 40% to 170,000 tonnes annually. Most of the capex will be focused on two products- thin stretch films and PVC food wrap. Over the next few years, Thong Guan intends to move away from the traditional stretch film products towards higher value-added products such as thin stretch films and nano-layer stretch films, which offer higher profit margins. At end-2014, the company set up a US$1m research and development centre devoted to stretch films at its Sungei Petani plant. Management also plans to focus on expanding its PVC food wrap division and targets to double its 2014 monthly capacity of 500 tonnes in 2015. We estimate the pretax profit margin for PVC food wrap at 10%, double those of stretch films.
M&As?
Thong Guan is also looking into M&As that offer synergy and earnings growth. Funding is not a concern, as it is supported by strong operational cash flows and the proceeds from a recent ICULS issue. We have not assumed any earnings from any potential M&As.
Source: CIMB Daybreak - 02 March 2015
Target RM3.06 (Stock Rating: ADD)
At only 62% of our forecast, Thong Guan’s FY14 net profit was below our and market expectations, mainly due to higher bad debt provision and forex losses in 4Q. However, we maintain our FY15-16 EPS forecasts, as we expect the company to benefit from the weaker Ringgit. We also introduce our FY17 EPS forecast. Our target price remains unchanged at RM3.06, based on 30% discount to fully-diluted SOP. Potential re-rating catalysts for the stock are EBITDA margin recovery and regional M&A developments. The stock remains an Add.
FY14 net profit down 37.9%
Thong Guan’s FY14 revenue was up 1.7% yoy but net profit was down 37.9%. The lower FY14 net profit was mainly due the RM5m bad debt provision and RM4m forex losses in 4Q due to the depreciation of the Ringgit against the US$ during the quarter. The company declared final DPS of 4 sen, bringing total FY14 DPS declared to 7 sen, below our 9 sen forecast.
Moving up the value chain
The Ringgit’s weakness against the US$ benefits Thong Guan in terms of cheaper labour and electricity costs compared to most of its global competitors. The company allocated RM100m capex (3-year programme that started in 2014) to boost group production capacity by 40% to 170,000 tonnes annually. Most of the capex will be focused on two products- thin stretch films and PVC food wrap. Over the next few years, Thong Guan intends to move away from the traditional stretch film products towards higher value-added products such as thin stretch films and nano-layer stretch films, which offer higher profit margins. At end-2014, the company set up a US$1m research and development centre devoted to stretch films at its Sungei Petani plant. Management also plans to focus on expanding its PVC food wrap division and targets to double its 2014 monthly capacity of 500 tonnes in 2015. We estimate the pretax profit margin for PVC food wrap at 10%, double those of stretch films.
M&As?
Thong Guan is also looking into M&As that offer synergy and earnings growth. Funding is not a concern, as it is supported by strong operational cash flows and the proceeds from a recent ICULS issue. We have not assumed any earnings from any potential M&As.
Source: CIMB Daybreak - 02 March 2015
