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Tuesday, November 18, 2014

Unwrapping a HIDDEN GEM!


This hidden gem is going to expand by 19% CAGR for the next 3 years. Market cap is below RM300m vs sales of RM720m. PE ratio is very low at 6.6 times vs Scientex 12 times. My target price is RM 3.50 for PE ratio of 10x. Dividend yield is also good at 4%. RHB Research target price is RM 3.60. Datuk Tong Kooi Onn of The Edge bought it for Value investing portfolio. Target return is 60%! What a BARGAIN!


1H14 net profit up 54.6% yoy!!!

1H14 revenue was up 7.5% yoy while net profit growth was higher, at 54.6%. TGI declared a 3 sen interim DPS, which is a positive surprise as the company usually pays a final DPS every July.

RHB: Its expansion into high-end plastic packaging and the PVC food wrap business is expected to derive a3-year earnings CAGR of 19% in 2013-2016F. Our target price of MYR3.60 is based on 11x FY15F P/E, ie broadly in line with target valuations of its peers. Currently TGI trades at an undemanding 6.4x FY15F P/E valuation relative to prospective earnings growth.

Major capex in the pipeline

TGI is considering a major capacity expansion exercise costing as much as RM100m over the next few years. 40% of the capex or RM40m would be used to add thin-stretch film lines and also nano-layers stretch film lines. We estimate that this expansion would raise the group's annual production capacity from 120,000 tonnes in 2013 to around 170,000 tonnes in 3-4 years.

Leveraging on its exposure to the Japanese market. TGI has been producing garbage bags for the Japanese market since the 1980s and Japan remains one of its major markets till today. This is due to the group’s consistent quality and product delivery. TGI is now eyeing further expansion in Japan in other areas of business, namely in food wrap, given the huge Japanese food and beverage (F&B) industry.

Initiate BUY with a MYR3.60 FV. Driven by the expansion of TGI’s high-end plastic packaging materials and PVC food wrap divisions, we are upbeat on TGI’s growth prospects moving forward and forecast a 3-year earnings CAGR of 19% (2013-2016F). Our FV is derived from pegging its fully-diluted FY15 EPS to a 11x P/E multiple, broadly in line with average peer target valuations of 12x. TGI is currently trading at an undemanding FY15 P/E of 6.4x.

The edge markets: THONG Guan is one of Asia Pacific’s largest producers of plastic packaging, including thin stretch film, garbage bags, PVC food wraps and industrial films. Export — big markets include Japan, ASEAN, Australia and China — accounted for about three-quarters of sales in 2013.

Outlook for the plastic packaging is upbeat with global demand expected to grow at a steady pace.

This is reflected in Thong Guan’s double-digit turnover growth over the past three years. Turnover increased from RM489 million in 2010 to RM720 million last year. In 1H14, the company’s turnover was up 7.5% to RM374 million from the previous corresponding period. Net profit grew an outsized 55% to RM16.7 million, from RM10.8 million over the same period.

In addition to the topline growth, Thong Guan also managed to expand its margins. This could be attributed, in part, to the company’s focus on R&D over the past few years, to produce higher value-added products that are more profitable. The recent drop in crude oil prices — lower raw material costs –also bode well for margins.

To cater to the future growth, it is looking to spend up to RM100 million to expand capacity for various product lines, including the polyvinyl chloride (PVC) food wrap segment that yields the highest margins. With net debt of just RM8 million at end-June and steady cash from operations, funding should not be an issue. In September, Thong Guan raised RM52.6mil by issuing ICULS to part-finance its expansion plan.

Valuations are attractive. At current price of RM2.05, the stock is trading well below its book value of RM2.89 and trailing 12-month PE of only 6.3 times. Plus, it gives shareholders pretty good yields. Dividends were raised from 6 sen in 2011 to 8 sen last year, translating into net yield of 3.9%.

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