Tomypak Holdings Bhd
(Nov 17, RM1.30)
Upgrade to “hold” with increased target price of RM1.37: Tomypak’s revenue for the first nine months of financial year 2014 (9MFY14) was down 7% year-on-year (y-o-y), mainly due to declining domestic revenue as export sales growth was flat. Net profit for 9MFY14 was down 59% y-o-y, mainly due to higher raw material and electricity costs.

The flexible packaging converter has been facing problems managing its operating costs since mid-2012. As such, we were relieved to see Tomypak’s earnings before interest, taxes, depreciation and amortisation (Ebitda) margin for the third quarter (3Q) of FY14 bounce back to 12.4% compared with only 8.4% in 2Q. We need the company to show operations are on the road to a sustainable recovery. The interim dividend per share (DPS) was one sen, in line with our expectation. Year-to-date, a four sen DPS has been declared.

In late October, the company proposed to acquire 4.2ha of industrial land in Kulai, Johor, for RM11.7 million. The land will be used to expand its operations. Funding is not an issue.

Tomypak’s balance sheet showed RM18 million net debt, or only 0.2 times net gearing as at end-September. We believe this land purchase is long overdue as the operations at its existing factory in Johor Baru (1.6ha) were already running out of space a few years ago.

In October, Yong Kwet On emerged as the new major shareholder, with a 25.4% stake in Tomypak. Yong has no major experience in the packaging industry but has been involved in the ICT industry over the past 30 years. So far, there have been no signs of what Yong wants to do with Tomypak. We are also surprised that Yong has yet to ask for a seat on the board.

We are upgrading Tomypak from “reduce” to “hold”. We have been negative on the stock since May due to the weak quarterly earnings results. Since then, its share price has been moving sideways. However, it looks like the share price is finding support at the RM1.30 level, which was the price at which the new major shareholder Yong acquired the 25.4% stake in the company. Until its earnings show continued signs of recovery, we are switching the valuation basis from earnings to a more conservative asset-based tool — 1.3 times 12-month average price-to-book value (P/BV) values the stock at RM1.37.

Tomypak’s weekly price chart shows the stock trading in a sideways channel since mid-2013. The channel support trend line is currently at RM1.23. The weekly moving average convergence/divergence is flat, while the relative strength indicator is facing resistance trend lines at the current levels. — CIMB Research, Nov 16

This article first appeared in The Edge Financial Daily, on November 18, 2014.