This article first appeared in The Edge Financial Daily on February 28, 2020

Thong Guan Industries Bhd
(Feb 27, RM4)
Downgrade to hold with a lower target price (TP) of RM4.17: Thong Guan Industries Bhd finished the financial year ended Dec 31, 2019 (FY19) on a strong note, with its core net profit exceeding our full-year estimate by 5%. Minus the unrealised foreign exchange gains, the group’s core net profit rose 37.5% year-on-year (y-o-y). A trifecta of factors aided Thong Guan’s handsome y-o-y bottom-line growth in FY19: i) a weaker ringgit against the US dollar; ii) lower material costs; and iii) an increase in exports of premium stretch films and courier bags. The group’s final dividend per share (DPS) of nine sen was also beyond our expectation of eight sen.

Quarter-to-quarter (q-o-q), Thong Guan’s fourth quarter of FY19 (4QFY19) revenue fell 9.7%. Lower plastic material orders are common at year end. However, the weaker ringgit and a lower effective tax rate pushed up the group’s core net profit by 3.2% q-o-q for 4QFY19.

Thong Guan acknowledged its business is facing challenges in light of the Covid-19 outbreak. As the malaise began only recently, we maintain our FY20 and FY21 earnings per share (EPS) forecasts for now. The group said it still endeavours to find new customers in the Malaysian market and overseas. It is also putting in place an additional premium stretch film line and a new blown film line coming from Germany, which should be ready by 2QFY20 to 3QFY20.

Thong Guan’s net cash stood at RM87.5 million as at end-December, equivalent to 55 sen per share. Its net cash alone already makes up 13.4% of its latest share price. For its dividends, we assume a 30% payout ratio, bringing its FY20 to FY22 DPS to between nine sen and 10 sen.

We make no changes to our FY20 and FY21 net profit forecasts but trim our EPS assumptions to reflect a bigger share base. Thong Guan shares have had a strong run since the second half of FY19. With the Covid-19 outbreak threatening global demand and the supply chain, we downgrade the stock to a “hold”. Our TP of RM4.17 is pegged at 13 times forecasted calendar year 2021 price-earnings ratio, our target multiple for the packaging sector. Upside risks include the ringgit testing new lows and raw material prices coming down further. — CGS-CIMB Research, Feb 27