Tomypak Holdings Bhd
(May 29, RM1.69)
Downgrade to reduce with higher target price of RM1.47. Tomypak’s first quarter financial year 2015 (1QFY15) revenue dipped 7% on-year but net profit surged 253% on-year. Higher profit not backed by revenue growth is unusual. 

Management attributed the profit recovery to production efficiency and better cost control. If we strip out the RM1.6 million reversal of slow moving inventory, 1QFY15 core net profit is RM4.2 million, 24% lower than the reported RM5.3 million net profit. 

The company declared a 1.5 sen dividend per share, in line with our expectations.

Since mid-2013, Tomypak’s quarterly revenue has been on a downtrend and as such, we were surprised by its sharp profit margin recovery since the 3QFY14 results.

Its competitor Daibochi has experienced rising quarterly revenue since early-2014 but has been facing higher cost pressures in areas such as electricity, labour and raw materials. 

Daibochi’s cheaper raw material prices in US dollar were offset by the weaker ringgit and it should be the same for Tomypak. 

We need to see Tomypak maintain its profit margin over the next few quarters to be convinced that its quarterly earnings are sustainable.

Tomypak’s balance sheet showed RM12 million net debt or 0.1 times net gearing as at end of March. 

Its 1QFY15 cash flow statement shows that the company invested RM12 million in capital expenditure, likely for the purchase payment for 10.4 acres (4.2ha) of industrial land in Kulai, Johor. 

We estimate that it might need to borrow another RM15 million to RM20 million for new machinery. — CIMB Research, May 29

This article first appeared in The Edge Financial Daily, on June 1, 2015.