Leading packaging maker Thong Guan at undemanding valuation

  • Ang: The target market capitalisation of RM1 billion is achievable because our company is still growing
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This article first appeared in Corporate, The Edge Malaysia Weekly, on June 6 - 12, 2016.

SHARES of Thong Guan Industries Bhd are trading near their all-time high of RM3.45 but valuation-wise, the stock is pegged at a price-earnings ratio (PER) of slightly less than eight times.

The region’s leading plastic packaging manufacturer does look appealing, considering its earnings growth and that its peers are trading at double-digit PERs.

When contacted, Thong Guan executive director Alvin Ang See Ming tells The Edge that the demand for plastic packaging products remains “very positive” across the board in every sector and country that Thong Guan is exporting to.

“Japan, our largest market, is still very strong. They don’t expect an increase in consumption tax at least until 2019, so there will be consistent organic growth,” he says.

Demand from Australia remains strong while Asean, Saudi Arabia and the United Arab Emirates are considered as growing markets for Thong Guan.

“The Middle East is looking good because they are rebuilding Iraq, so the growth is quite high there. We are also getting orders from countries like Iran,” says Ang.

Next, the company will expand into post-Soviet states such as Azerbaijan, Georgia and Armenia. At the same time, it is exploring new business opportunities in some African countries.

In the financial year ended Dec 31, 2015 (FY2015), despite a marginal drop in revenue to RM711 million, Thong Guan’s net profit more than doubled to RM38.5 million from RM17.4 million the year before. This was also despite a foreign exchange loss of RM12.75 million. The stellar performance was attributed to wider profit margins from exports, which were mostly denominated in US dollars.

The growth momentum continued in the first quarter ended March 31, 2016 (1QFY2016) — the group’s net profit almost tripled to RM13 million from RM4.6 million a year earlier. On an annualised basis, Thong Guan’s net profit would be RM52 million in FY2016, which would be a record-breaking year.

It is worth noting that the big leap in the quarterly earnings happened despite a foreign exchange loss of RM7.96 million in the quarter under review.

Ang highlights that export-oriented Thong Guan will continue to benefit from the low oil price environment as well as the strong US dollar.

Ang, whose family founded the group, believes that the company deserves better valuations, considering its competitors, which are smaller in size, are trading at much higher PERs.

He opines that once the investors realise the true potential of Thong Guan, it could have a market capitalisation of RM1 billion in three to five years’ time.

“The target market capitalisation of RM1 billion is achievable because our company is still growing. At the moment, the market gives us a very low valuation. If we correct that by 30% and our earnings grow at double digits, we will be there soon,” he says.

Ang, 46, is the son of group managing director Datuk Ang Poon Chuan. He joined Thong Guan in 1993 as an accounts executive before moving up the ranks to become general manager. In 2013, he was appointed to the board.

Based on its trailing 12-month earnings per share of 45 sen, the stock is currently trading at a PER of merely 7.6 times.

In comparison, Scientex Bhd, which is also involved in property development, is valued at a PER of 13.83 times with the highest market capitalisation of RM3 billion. BP Plastics Holding Bhd, which has the lowest market capitalisation of RM287 million, is also fetching a double-digit PER of 11.74 times.

But among its peers, SLP Resources Bhd, despite posting much smaller revenue and earnings, commands the highest PER of 22.18 times, giving it a market capitalisation of RM618 million, about 70% higher than Thong Guan’s.

“In the past, we have been focusing on building the company. But now, we need to promote the company more. It’s not so good to be valued lower than our competitors because we are more mature than many of them. I find it hard to understand. Something is wrong and we need to correct the situation,” Ang says.

Considering that SLP Resources is now trading at a PER of more 20 times, Ang believes that a PER of 15 times for Thong Guan “is not asking too much”.

On the global oil price, which is the key to resin pricing, he also expects it to remain favourable to Thong Guan’s cost of production.

“The shale producers are already making good money at US$50 [a barrel]. Opec (Organization of the Petroleum Exporting Countries) is going nowhere and Russia is in a very bad position, so US$50 will be quite high for them. A lot of wells are coming up in places like Africa, and there is no shortage of oil in the world anyway,” he says.

On corporate exercises, Ang says Thong Guan is considering a share split or bonus issue as tight liquidity has been an issue for the group.

Foremost Equals Sdn Bhd, the private vehicle of the Ang family, controls 39.81% of Thong Guan.

Thong Guan may not be on the radar of large institutional funds but it has attracted prominent individual value investors, including low-profile investment guru Dr Neoh Soon Kean, savvy investor and philanthropist Koon Yew Yin as well as reputable value investor Fong Si Ling, who is better known as “Cold Eye” in the investing circle.