Founded back in 1942 as a firm that engages in the trading and distribution of tea and coffee, Thong Guan Industries (TGI) has since evolved into one of Asia Pacific’s largest plastic packaging companies. These days, the group’s core business lies in the production of a wide range of plastic bag and films, though it still sells tea, coffee and other food and beverage products.
What really catches our attention though is the impressive share price performance of the company. TGI’s share price has more than doubled from its level in August 2015 and gained 64.2 percent year-to-date based on the close price of RM4.20 as of 29 November’s close. Hence, let us dig deeper to see if there is more value to be uncovered.
The group’s businesses can be broadly classified under two main segments namely plastic products and food, beverage and consumable (F&B) products.
The plastic products segment, which is the group’s core business, entails the manufacturing of various plastic packaging products including stretch film, polyvinyl chloride (PVC) food wrap, garbage bags as well as industrial bags and films. The segment contributed to 94.7 percent of FY15 turnover, with stretch film being the largest revenue contributor within the segment. To give readers some background, stretch film is a stretchable plastic film mainly used in the logistics sector that is wrapped around items to secure it on the pallets during transport and storage.
Meanwhile, the F&B segment dabbles in the manufacturing and trading of food, beverage and consumable products which include tea, coffee, curry powder and breakfast cereal, under the “888” brand and other brands. In FY15, the firm ventured into the noodles manufacturing business via the acquisition of a 60 percent stake in Everprosper Food Industries.
Eyeing A Record FY16
In its latest 9M16 financial results reported on 24 November, TGI registered a 6.7 percent rise in revenue to RM551.1 million mainly due to higher sales in the group’s plastic products segment. In particular, higher export sales were recorded for its garbage bags, stretch films and PVC food wrap, which yielded higher margins.
TGI is certainly an export-driven firm, given that 78.2 percent of FY15 revenue was derived from customers outside Malaysia. With exports mostly denominated in the US dollar, the strengthening of the dollar against the Malaysian ringgit has contributed to the improved margins for export sales.
Coupled with the continued focus on value-added products that earn higher margins and improvement in profitability of its China operations, 9M16 earnings surged 87.8 percent to RM43.2 million, already exceeding FY15 net profit of RM38.5 million. Barring unforeseen circumstances, the stellar 9M16 results set the stage for a record FY16 net profit.
Capacity Expansion To Drive Growth
Back in 2014, TGI committed to a three-year RM100 million expansion plan to increase capacity. The group also placed more focus on research and development (R&D) with a new R&D centre at its Sungai Petani plant, and hoped to develop a new range of high value-added services and products to targeted customers.
While there have been some delays, the company finally commissioned its new 33-layer nano-technology stretch film line, a five-layer blown film line, an automatic continuous organic noodle production line, as well as its R&D centre in 1Q16. Additionally, TGI expects to take delivery of its seventh seventh PVC food wrap line in December.
Contributions from the new capacities commissioned in 1Q16 has yet to contribute significantly to the firm but is expected to flow in from FY17.
Areas Of Focus
Looking ahead, TGI already has more expansion plans in line.
Market response for its new 33-layer nano-technology stretch film (lighter and stronger) appears to be encouraging, as management has planned for a second 33-layer nano-technology stretch machine by 2Q17. Higher margins are expected from the newer products as they are thinner and require less raw material inputs.
Another area of focus is the PVC food wrap division, which earns higher margins and is seeing robust demand. TGI’s PVC wrap capacity is maintained at 85 percent and above and the group hopes to add two to three more PVC wrap production lines by end-2017. The firm targets to increase PVC food wrap output from the current 8,000 tonnes per annum to 14,000 tonnes per annum by 2018 and double the division’s revenue contribution to about 18 percent by then.
TGI is also placing attention on its new noodles business. The group’s latest noodle production facility has the capacity to produce RM60 million worth of noodle products annually and management updated that the facility has received organic certifications from authorities in Japan, China and Australia. The firm targets RM20 million sales from the noodle business in FY17.
Based on a price of RM4.20 per share, TGI shares are trading at trailing twelve months (TTM) price-to-earnings ratio (P/E) of 9.2 times. Interestingly, despite the huge run up in share price, we note that TGI shares are still trading at a lower P/E as compared its peers listed on Bursa Malaysia, with the average P/E of five peers standing at 16.7 times.
Apart from Scientex, which is also involved in the construction business, TGI actually has the highest TTM revenue and net profit amongst the rest of its peers. While we cannot be sure if TGI is undervalued or if its peers are simply overvalued, valuations relative to peers seem attractive at least.
On the other hand, analysts on the street seem to be feeling upbeat about TGI. Consensus target price for TGI shares stands at RM5.16 per share with the equivalent of a ‘Buy’ rating, representing a more than 20 percent upside from RM4.20.
Furthermore, we also like that TGI has a net cash position of RM76.4 million as of 30 September 2016, which translates to approximately RM0.66 per share. The strong balance sheet helps support the planned capital expenditure and also gives the firm capacity to take up mergers and acquisitions as mentioned by management.
Lastly, we note that key risks to the company include foreign exchange risk (affects export sales) and volatility in raw material prices. In particular, a spike in crude prices would affect TGI as key raw material resin is a by-product of oil processing and generally follows the trend of crude prices.