Progressive revenue increase seen for Tong Herr for FY17 to FY19

This article first appeared in The Edge Financial Daily, on May 23, 2017.
Progressive revenue increase seen for Tong Herr for FY17 to FY19
-A +A

Tong Herr Resources Bhd
(May 22, RM3.62)
Reinitiate buy call with a target price (TP) of RM4.25:
Tong Herr Resources Bhd has three main subsidiaries in Malaysia and Thailand. They are involved in the manufacturing and selling of stainless steel fasteners such as bolt, screws, nuts, stud bolts and threaded rods, as well as aluminium.

Post acquisition, the group owns approximately a 100% equity interest in Tong Heer Fasteners (Thailand) Co Ltd (THFT). This would allow it to facilitate future plans on business expansion, enhancing cost efficiencies and human resources development.

Tong Herr completed the disposal of its 35.33% equity interest in Fuco International Ltd, thereby relinquishing the loss-making business entity and realising its investment.

The group’s revenue has been relatively stable at above RM500 million for the last four years. Its factories in Malaysia and Thailand export approximately 95% and 90% of products to other countries, with Germany as its largest customer (18% of financial year 2016 [FY16] revenue), followed by the US (16%), Thailand (3%) and others (39%).

We expect its revenue to increase progressively for FY17 to FY19, in line with our in-house economists’ view on improving global growth from firmer activity and potential fiscal stimulus in the US, as well as an improvement in Germany’s economy.

The group is in a net cash position. It declared an exceptionally high 30 sen dividend per share (DPS) for FY16. We estimate its FY17 to FY19 DPS at a more sustainable 20 sen per annum.

We reinitiate coverage with a “buy” recommendation and a TP of RM4.25.

Tong Herr deserves this valuation after posting an improvement in FY16 earnings, aside from its solid balance sheet with attractive dividend yields.

Moreover, we think it is likely to achieve an improvement in earnings post acquisition of the majority equity interest in THFT and disposal of its loss-making associate.

We exclude FY14 and FY15 from our historical forward price-earnings valuation in order to remove the outlier effect caused by its exceptionally low bottom line in FY15.

Note that its assigned price-earnings ratio (PER) is still lower than the FTSE Bursa Malaysia Small Cap Index’s 13 times FY17 forecast PER.

Key risks include slower-than-expected demand for its products, higher-than-expected raw material costs, currency risks and changes in the global economy. — RHB Research Institute, May 22