This article first appeared in The Edge Financial Daily on June 27, 2018

NTPM Holdings Bhd
(June 26, 53.5 sen)
Maintain buy with a target price of 65 sen: NTPM Holdings Bhd’s core net profit for financial year 2018 (FY18) of RM35 million (-33% year-on-year [y-o-y]) was below expectations, at just 88% of our full-year forecast. The negative deviation could be attributed to the softer-than-expected sales in the personal care segment and our overly optimistic margin assumptions. Y-o-y, FY18 revenue rose by a healthy 7% to RM691 million, thanks to the robust 8% sales growth in the paper product segment (70% of FY18 revenue). Even then, sales charted by its personal care division only grew 2% y-o-y due to the intense competition. Meanwhile, core net profit dipped 35% quarter-on-quarter to RM35 million, mainly dragged down by high raw material costs.

The group has increased its prices to pass on a majority of the additional costs arising from high raw material prices.

Its management may review its pricing strategy to mitigate the tight competition in the personal care product market. We expect the impact to be reflected in its books from first quarter of FY19 ending July 31, 2018 onwards, and this would in turn drive an earnings recovery (+32% y-o-y) in FY19. Looking further, the inelastic demand for its products should continue to sustain the resilient top-line growth. To capture demand, the group could expand the production capacity at both its Malaysian (to 110,000 tonnes from 100,000 tonnes) and Vietnamese (to 50,000 tonnes from 10,000 tonnes) plants by end-2018. This would underpin its long-term earnings growth, in our view.

However, we reiterate our positive stance on the stock, as we continue to like this leader of the local tissue paper market, backed by its established brands and sound fundamentals. The stock is currently trading at an undemanding 14 times price-earnings ratio of FY19, which is well below its five-year mean of 16 times. — RHB Research Institute, June 26