Demand in key operating segments lifts Thong Guan

PETALING JAYA: Thong Guan Industries Bhd is projected to experience solid growth in earnings ahead on the back of strong demand and margin expansion of its offerings.

Kenanga Research stated as economies reopen, the plastic packaging producer’s key operating segments namely stretch film, blown film and food wrap, saw an increase in demand.

Despite the drop in the cost of input resin, Thong Guan’s selling prices held up, and led to margin expansion for its products like nano stretch film and food wraps.

“The group’s selling prices for nano stretch film have remained relatively firm despite the falling cost of input resin in tandem with the weaker oil prices, hence boosting margins.

“Nano stretch film makes up about 50% to its total stretch film production, while stretch film contributes to about half of the group’s revenue,” said Kenanga Research in a report. Thong Guan’s courier bags, a blown film product, also saw high demand in the third quarter of 2022 due partly to the decline in the group’s customers’ stocks.

“The group is able to capitalise on this trend, given a 50% increase in its courier bag manufacturing capacity recently.

“Courier bags contribute about 6% of the group’s total revenue in financial year 2021 (FY21),” said Kenanga Research.

Thong Guan’s production of food wraps also saw an upward trend due to stronger demand from the hospitality sector, particularly restaurants.

“The resulting margin improvement from falling cost of PVC resin is expected to return the division back to the black from losses in FY21,” said Kenanga Research.

Commissioned early this month, the group’s three new blown film lines had ramp up production capacity by a third to 200,000 tonnes per annum.

“For now, the three new lines are mainly designated for the production of oil, sugar and lamination films, largely used in the industrial, food and beverage along with the fast-moving consumer goods sectors,” said the research house.

Kenanga Research estimated the company met about 70% of its requirement for foreign workers as certain processes in its operations are highly labour intensive like in the packing of finished courier and garbage bags.

The group is bringing in new foreign workers in batches from the second half of 2022.

“Thong Guan has already obtained approval from authorities to bring in the first batch of workers, which should improve the situation to 80% of its foreign worker requirement,” said Kenanga Research. Kenanga Research maintained an “outperform” call on Thong Guan with a higher target price of RM3.99 per share.

This is based on FY23 price earnings multiple of 11 times, which is at a 10% premium to the sector’s average forward price earning ratio of 10 times.

This also reflects Thong Guan’s stronger earnings stability underpinned by a more diversified product portfolio and its strong growth prospects backed by capacity expansion for its premium products.

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