KUALA LUMPUR (May 29): Tomypak Holdings Bhd share price headed south today despite the packaging material maker announcing a sharp jump in profit for the first financial quarter ended March 31 (1QFY15).

Its share price dropped five sen or 2.86% to RM1.69, with some 1.7 million shares changing hands.  

CIMB Investment Bank downgraded the stock on the back of expensive valuation and doubts whether the company could sustain its wide profit margin as its peers in the industry are suffering from high cost pressure.

Tomypak’s (fundamental: 1.8; valuation: 1.4) net profit leapt 253% to RM5.33 million for 1QFY15 from RM1.5 million a year ago, although its revenue fell 7% to RM52.12 million.

In a report, CIMB Investment Bank downgraded the stock to “Reduce” from “Hold” as its current valuation is expensive after a 20% rally in May. The stock had reached a five-year high of RM1.85 on May 18 this year.

The research firm’s analyst Nigel Foo said Tomypak’s higher profit which is not backed by revenue growth is “unusual”.

“Management attributed the profit recovery to production efficiency and better cost control,” he said.

“If we stripped 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,” he added.

Foo also said since mid-2013, Tomypak’s quarterly revenue has been on a downtrend and therefore, the sharp increase in profit margin since the third quarter of financial year 2014 (3QFY14) results was “surprising.”

He said for comparison, Tomypak’s competitor Daibochi Plastic and Packaging Industry Bhd has experienced rising quarterly revenue since early-2014 but has been facing higher cost pressures in areas such as electricity, labour and raw material costs.

Tomypak should be experiencing a similar situation to Daibochi, whereby cheaper raw material prices in US dollar was offset by the weaker ringgit exchange rate, he added.

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

He said Tomypak’s balance sheet showed RM12 million net debt or 0.1 times net gearing as at end-March and a RM12 million allocation in capital expenditure, likely for the purchase payment for 10.4 acres of industrial land in Kulai, Johor.

(Note: The Edge Research's fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations.)