PETALING JAYA: Thong Guan Industries Bhd’s healthy balance sheet and strong net cash position of RM87mil are positives.
This is on the fact that this year may be a challenging year for the stretch film and plastic packaging maker.
Kenanga Research said this to clients in a report, adding that Thong Guan’s production activities have been affected due to travel restrictions, as well as the movement control order implemented in the country to curb Covid-19.
“That said, they are also focused on improving sales and margins for existing products and aims to target more export markets, ” Kenanga said.
The company is also concentrating on continued expansion into higher-margin segments.
It generates the majority of its revenue from the plastic products segment which comprises of stretch films, garbage bags, industrial bags and PVC (polyvinyl chloride) food wrap.
Nevertheless, the research outfit believes upside is limited in the near term for Thong Guan.
“We take the cue from the challenging market conditions that may affect the sector for now, ” it said.
CGS-CIMB is slightly more positive.
“Although many parts of the world began instituting some form of lockdown and social restrictions in March to suppress the Covid-19 coronavirus spread,
“Thong Guan still managed to eke out a 5.4% quarter-on-quarter topline growth in the first quarter of 2020, ” it said.
The research house said the resilient demand for PVC food wraps “should assist Thong Guan to stay on a growth path”.
It also said the company’s plans to add another premium stretch film line and a blown film line for its German operations are likely to be delayed from the original timeline of the second to third quarter of this year.
“However, we believe that demand for PVC food wraps is defensive and its usage perhaps could rise with take-outs booming during the stay-at-home order.
“With that, we raise our financial year 2020 (FY20)- FY22 earnings per share by 17%-31%.”
CGS-CIMB also pointed out that Thong Guan’s net cash stood at RM87.1mil as at end-March 2020, which is equivalent to 47 sen per share.
For dividends, “we assume a 30% payout ratio, bringing its FY20-FY22 dividend per share to between 11 sen and 12 sen, ” it said.
At last look, Thong Guan shares were six sen up to RM3.64.
In its report, CGS-CIMB said upside risks for the stock include further declines in the ringgit and raw material prices. “Downside risks are a rebound in oil prices and the US dollar enervating.”
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