This article first appeared in The Edge Financial Daily on June 13, 2017

Tomypak Holdings Bhd
(June 9, 99.5 sen)
Initiate market perform with a target price of RM1: Tomypak Holdings Bhd is the second largest converter for flexible food packaging in Malaysia, servicing reputable clientele such as Nestle and Ajinomoto, and it has local and international exposure. As a consumer product packager, Tomypak’s production lines focus more on downstream processes, making it directly comparable to Daibochi Plastic And Packaging Industry Bhd, while SLP Resources Bhd and SCGM Bhd are more focused on upstream production (which is extrusion).

Tomypak commenced its turnaround in 2014 with the appointment of a new management, namely, Lim Hun Swee as the group’s new managing director, and Tan See Yin as its executive director.

With turnaround efforts to reduce wastage, and investment in an advanced metalising machine, earnings before interest and tax (Ebit) margins improved to 14.8% to 11.2% from financial year 2015 (FY15) to FY16 (from 5.8% in FY14).

The prospects are for stable growth mainly driven by capacity expansion plans, as Tomypak has plans to increase capacity by 89% up to 36,000 tonnes per annum by FY20 to FY21 (from 19,000 tonnes per annum currently) by constructing a new plant in Senai. Phase 1 of the capacity expansion plan will come on-stream from second half of 2017 (2H17) to 1H18, while Phases 2 and 3 will see capacity growing gradually from FY19 up till FY20 to FY21. As such, we expect revenue to grow by 11% to 23% from FY17 to estimate FY18 (FY18E), while historical revenue growth has been rather flattish at 2.4% to -1.5% from FY15 to FY16.

Tomypak’s two-year forward average earnings (24%) is the third highest among its peers, and higher than its direct competitor, Daiboci (21%). FY17 is poised to be a turnaround year mainly driven by the group’s bullish capacity expansion plans, and backed by stable Ebit margins (12% to 12% from FY17 to FY18), lower effective tax rates (12% to 13% from FY17 to FY18, versus 21% in FY16) from Reinvestment Tax Allowance (RA), and riding off of a weaker FY16 due to higher operating costs and the absence of the RA. — Kenanga Research, June 9