Thursday 28 Mar 2024
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This article first appeared in Capital, The Edge Malaysia Weekly on April 24, 2017 - April 30, 2017

THONG Guan Industries Bhd may not be on the radar screen of large institutional funds but Asia-Pacific’s leading plastic packaging manufacturer has attracted prominent individual value investors.

They include low-profile investment guru Dr Neoh Soon Kean, savvy investor and philanthropist Koon Yew Yin as well as reputable value investor Fong Si Ling, better known as “Cold Eye” in investing circles.

Over the last 12 months, Thong Guan’s shares have risen 49% while its issued warrants — TGUAN-WA — have gained at a much faster pace of 54%. Still, for investors who wish to ride Thong Guan’s growth, its warrants appear to be a cheaper proxy.

The five-year TGUAN-WA, which carries a strike price of RM1.50 and a one-to-one conversion ratio, will expire on Oct 9, 2019. The derivative, listed on Oct 10, 2014, came free with a rights issue of irredeemable convertible unsecured loan stocks.

Despite the strong run, TGUAN-WA, which closed at RM2.91 last Wednesday, is still trading at a slight discount of 0.9% to the mother share, which closed at RM4.45 on the same day. At zero premium, TGUAN-WA would theoretically be worth RM2.95.

Bloomberg data shows a consensus target price of RM5.24 for Thong Guan, giving the stock an upside potential of 18%. That means that at zero premium, TGUAN-WA would theoretically be worth RM3.74, if the mother share hits the target price. This presents an even higher upside of 28.5% for the warrant.

In a Feb 28 report, Kenanga Research analyst Marie Vaz says she expects sustained top and bottom line growth for Thong Guan, driven by higher margin products with the commissioning of its second 33-layer nanotechnology stretch film line and its eighth polyvinyl chloride (PVC) food wrap line in the second half of this year as well as plans for a five-layer blown film line, which are expected to accrete mostly in 2018.

“Thong Guan is consistently investing in research and development to improve its sales and margins on existing products such as stretch film, and is continuing to revamp its customer base to target more multinational corporations,” she says.

Kenanga Research maintains its “market perform” call on Thong Guan as the group’s fundamentals are intact while the downside risks are limited due to the export-driven play and weak ringgit environment.

The research house raised its target price to RM4.76 — 14.6 times a higher FY2017 earnings per share of 32.6 sen. At zero premium to the underlying share, TGUAN-WA would theoretically be worth 12% more at RM3.26, if the mother share rises 7% to RM4.76.

 

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