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This article first appeared in The Edge Financial Daily on February 12, 2019

Tomypak Holdings Bhd
(Feb 11, 64.5 sen)
Upgrade to hold with an increased target price (TP) of 70 sen:
We expect Tomypak Holdings Bhd to report better earnings growth and earnings before interest, taxes, depreciation and amortisation (Ebitda) margin in financial year 2019 (FY19), on a better operational efficiency and a lower resin cost. We’re maintaining our financial forecasts for now, pending the release of Tomypak’s fourth quarter of 2018 (4QFY18) results. We rolled forward price-earnings ratio (PER) valuations to FY20, deriving a revised TP of 70 sen (FY20 PER of 22.3 times; +1 standard deviation to long-term mean); and upgrade to a “hold” call.

 

We expect Tomypak to report a more than 100% year-on-year jump in 4QFY18 core net profit to RM1.2 million from a net loss of RM1.6 million in 4QFY17 (3QFY18: +RM3.1 million; the first nine months of 2018: +RM3.4 million), on recognition of reinvestment allowance. We expect Tomypak to demonstrate an improved FY19 estimate Ebitda margin of 12% from 8.5% in FY18E, benefiting from an enhanced production efficiency from its new advanced technology; the realignment of production processes at its Senai and Tampoi plants and upgrade in system production processes; and a better cost management.

We expect Tomypak’s profit margin to improve further in FY19 due to a downward drift in resin prices since October 2018, having fallen an average of 8% to 10%. The decline has largely been due to a weakening crude oil price and the ongoing trade war between the US and China. Our petrochemical industry analyst expects petrochemical prices to remain under pressure this year due to distortions in the global supply chain. We believe Tomypak will benefit, considering a weaker ringgit, from a time lag between cheap raw materials and competitive selling prices. — Maybank IB Research, Feb 11

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