Analysts optimistic about Thong Guan’s FY21, order visibility longer than usual
KUALA LUMPUR: Thong Guan Industries Bhd’s (Thong Guan) prospects for the financial year 2021 (FY21) have been viewed positively by analysts as its business remains busy while its order visibility is longer than usual on the back of lower resin prices since its recent peak in December 2020.
Following a conference call with Thong Guan’s management, the research team at Kenanga Investment Bank Bhd (Kenanga Research) said it came away feeling optimistic about FY21 as business remains busy and order visibility is longer than usual on the back of lower resin prices since its recent peak in December 2020.
“Going forward, the continued growth of their high-margin products will help sustain core net profit margins of seven to eight per cent in FY20 to FY21,” it projected.
While resin costs have risen since bottoming in May 2020, it noted that the spot prices do not directly translate into Thong Guan’s cost as it has been managing resin costs prudently by taking delivery of old orders of LLDPE at US$860 per metric tonne from the US and LDPE at US$1,000 per metric tonne from the Middle East.
It has also altered the resin composition of its products to achieve favourable costs, and procured from the spot market only for whatever is necessary.
It also pointed out that the group’s stretch films (SF), both conventional and premium, and garbage bags are seeing greater orderbook visibility of up to two months compared to the usual one month as local and European customers are buying more SF as they expand, while Japanese customers are stocking up on garbage bags to avoid shortages during the Chinese New Year holiday. Additionally, the courier bag business continues to fare well.
“We believe that the growing segments of premium-SF and courier bags augurs well for Thong Guan as they continue transforming into a value-driven business.
“In the preceding quarters prior to the multi-year low resin prices in 2Q20, Thong Guan has consistently grown their margins.
“Although 4Q20 CNP margins (estimated seven per cent) may not be as attractive as 2Q/3Q20 (eight per cent), we believe that moving forward, the more premium-product mix can help the group sustain gross profit margins of at least 16 per cent and CNP margins of seven to eight per cent,” Kenanga Research said.
All in, it maintained its ‘outperform’ call on the stock based on its positive prospects for FY21.