TOMYPAK HOLDINGS BHD

By Kenanga Research Market perform Target price: RM1

TOMYPAK’S turnaround efforts have proven successful in FY15 and FY16 with its new key management since FY14, with improved margins while growth going forward is driven by the group’s bullish capacity expansion plans.

Kenanga Research noted that the group aimed to expand its capacity by 89% between FY17 and FY21.

The research house has initiated coverage on the stock with a “market perform” call and a fully diluted target price of RM1.

“Backed by reputable clients ensuring resilient demand as well as lower taxation on reinvestment tax allowance benefits, we expect decent FY17-FY18 core net profit growth of 25%-24%,” it said in a note.

The research house said it liked Tomypak for the company’s reputable clientele base, internationally certified product standards, effective turnaround plans, bullish capacity expansion plans and the company being a net beneficiary of a strengthening US dollar.

It also likes Tomypak, which is the country’s second largest converter of flexible food packaging, for its strong estimated earnings growth in FY17-FY18, driven by its bullish capacity expansion plans.

Since 2014, the group has been engaging in initiatives to improve its production processes such as wastage reduction for its Tampoi plant and through investment into advanced production machinery without having to undergo major revamps.

As a result of these efforts, earnings before interest and tax margins improved to 14.8% and 11.2% in FY15-FY16.

The group also plans to increase capacity by 89% up to 36,000 tonnes per annum by FY20-FY21 from 19,000 tonnes per annum currently by constructing a new plant in Senai.

The research house noted that phase one of the capacity expansion would come on stream from the second half of 2017 to the first half of 2018, while phase two and three would see capacity growing gradually from FY19 until FY20-FY21.

“As such, we expect revenue to grow by 11%-23% in FY17-FY18, while historical revenue growths have been rather flattish at 2.4% to -1.5% in FY15-FY16.”