Thong Guan unperturbed by stronger ringgit

This article first appeared in The Edge Malaysia Weekly, on January 29, 2018 - February 04, 2018.

Ang: We can’t determine the way the ringgit moves. We can only cushion it. Photo by Suhaimi Yusuf/The Edge

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THE ringgit’s recent rally — it reached 3.88 against the US dollar last Thursday from 4.43 a year ago — may not be beneficial to exporters given that they recognise a foreign exchange gain in their books when the currency weakens.

However, this does not appear to worry Alvin Ang See Ming, executive director of Thong Guan Industries Bhd. He says any potential impact on the group’s bottom line will be lessened by a natural hedge, as some of its costs are in US dollars.

“We can’t determine the way the ringgit moves. We can only cushion it, so our plan is to naturally hedge our cash flow as much as possible.

“We are long on US dollars as 80% of our sales are derived from exports, of which 70% is in US dollars. But our purchases and loans are in US dollars, so when the ringgit appreciates, this helps to cushion the impact,” he tells The Edge on the sidelines of the Invest Malaysia 2018 conference.

Another way the group mitigates the forex impact is by taking an aggressive approach to improving its top line by increasing its capacity and venturing into new markets with its current products.

Thong Guan is one of the 10 largest producers of stretch film in the world. The group produces both conventional and nano-layer stretch film, though its focus is now on growing the latter in markets such as Europe, where demand for the product is high as it is more suitable for wrapping machines.

“In Europe, we do not enjoy the generalised scheme of preferences (GSP) anymore, so we have to pay the 6.5% import duty. That we are able to absorb the import duty proves that our high-performance film commands margins beyond the 6.5%, and we are able to compete against European players who do not pay import duties at all,” Ang remarks.

“Europe is a large consumer of nano-layer stretch film, thanks to the standards of the European Safe Logistics Association (Eumos). The region consumes 1.2 million tonnes of the product a year, while we are producing 800 tonnes a month, meaning [our share] is less than 1% of the market.

“We have set up two warehouses in Europe — one in Italy and another in Germany — which we hope will help us attain a 1% share of the market this year,” he says.

The group is also looking to venture into Mexico with its nano-layer stretch film, taking advantage of the growing trade tensions between the country and the US.

“Mexico is one of the largest consumers of soft drinks in the world and at present, 90% of its film is imported from the US. But now, with [talks of a US-Mexico border wall], less film is going in from the US and, instead, more film from Malaysia is being exported there, so it’s an exciting market that we are looking at,” Ang enthuses.

Thong Guan also has its eye on the market in China “but this is still in negotiations”, he reveals.

Margins for nano-layer stretch film are understood to be higher. The line’s average profit before tax margin is 12% to 15%, versus 5% to 6% for conventional lines, CIMB Research states in a Dec 11, 2017, note.

Plans are underway for a third nano-layer stretch line to be installed at Thong Guan’s plant in Sungai Petani, Kedah, in September. “The new line will generate at least RM100 million of extra revenue for us,” says Ang.

He adds that the group has plans to construct another factory by the first quarter of next year, which will be a “highly efficient plant” that will house its stretch lines. It is expected to generate RM1.5 billion to RM2 billion of revenue for the group over the next 10 to 15 years.

Apart from stretch film, the group also manufactures garbage bags, commercial bags, film and sheets as well as PVC food wrap under its plastic products division.

Plastic products made up 93% of the group’s revenue for the nine months ended Sept 30 last year (9MFY2017), while its food and beverage and other consumable products division accounted for the remaining 7%.

For 9MFY2017, revenue grew 12.8% year on year to RM621.66 million, while net profit fell 3.6% to RM41.6 million as a result of a drop in the sales of its tea products and initial operating losses from its restaurants division.

Thong Guan’s F&B division is its legacy business. The group is one of the pioneer tea producers in Malaysia, with its products being packed under the 888 brand. Its product range has since expanded to include coffee, instant beverages and organic food such as organic noodles.

The group plans to grow its organic noodle business exponentially, especially in China.

“We have signed a contract with a Chinese vendor that supplies to 7,500 stores in the country, and have shipped two containers of organic noodle products there. We will continue to work hard on this new business venture,” says Ang.

In August last year, Thong Guan announced that it was the new master franchisee for the Swiss restaurant chain Marché Mövenpick in Malaysia. The group opened its first Marché restaurant at Pavilion Kuala Lumpur.

“Currently, we are operating in Pavilion. We are still in the process of refining our processes as well as increasing promotional activities to further increase footfall in Marché,” Ang explains.

Based on its closing share price of RM4.11 last Thursday and CIMB Research’s estimated FY2018 earnings per share of 69 sen, Thong Guan’s price-earnings ratio (PER) is at 5.95 times.

CIMB has an “add” call on the stock with a target price of RM5.90, based on a forward PER of 13 times FY2019 earnings.

Kenanga Research has an “outperform” call on Thong Guan with a target price of RM5.55, based on a forward PER of 15.3 times FY2018 earnings.

By comparison, the research firm has valued Scientex Bhd — Thong Guan’s closest competitor — at 17.4 times FY2018 earnings.

In a Jan 5 note on the plastics industry, Kenanga Research says Thong Guan remains a laggard in terms of its share price performance, despite its solid earnings and fundamentals.

“We believe growth going forward will be driven by its ability to increase sales of its higher margin products, and by increased sales to Europe, Australia and New Zealand.

“Furthermore, its healthy balance sheet is better than its peers, save for SLP Resources Bhd, and we expect this to be maintained going forward,” Kenanga Research writes.

Thong Guan is in a net cash position with RM130.1 million in cash on its books against RM69.16 million in borrowings. This works out to about 45 sen per share.

The research firm also notes that Thong Guan had consistently paid out 25% to 30% of its earnings, despite having no formal dividend policy. Based on a Bloomberg consensus estimated FY2018 dividend per share of 14 sen, Thong Guan’s dividend yield works out to 3.4%.

Ang’s family controls some 45.5% of Thong Guan. The group counts seasoned investors as its shareholders, including Dr Neoh Soon Kean — who holds Thong Guan shares via his vehicle, Neoh Choo Ee & Co Sdn Bhd — and Fong Siling, who is commonly known in investing circles as “Cold Eye”.


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