Kenanga Research noted that Thong Guan’s stretch film division will continue to serve as the primary growth driver for the group in the coming years.
PETALING JAYA: Plastic packaging manufacturer Thong Guan Industries Bhd
’s medium-term earnings are expected to be enhanced following its recent diversification into the property development segment, says Kenanga Research.
In May 2024, the group entered into a joint venture with Perbadanan Kemajuan Negeri Kedah to undertake a 20-acre commercial development project.
With a gross development value of RM221mil over the next five years as well as the strategic location of the landbank, the research house believes this venture will add to the group’s earnings over the medium term.
Not forgetting its core business in plastic packaging, Kenanga Research noted that Thong Guan’s stretch film division will continue to serve as the primary growth driver for the group in the coming years.
The group utilises a much thinner yet stronger film that requires less resin, making it more cost-effective and enabling Thong Guan to secure new customers.
“With only less than 5% share in the European and US markets, there is significant room for expansion and Thong Guan is ready to seize more market share there, helped by innovative products,” the research house stated.
Additionally, this growth potential extends to its industrial bags and new production line.
According to Kenanga Research, the group is ramping up production in its industrial bag division due to increased orders for packaging products, which contributed 18% to Thong Guan’s revenue in the second quarter of financial year 2024.
“The commissioning of a new stretch hood line enhances production efficiency, as it allows existing lines to focus on shrink film production,” it added.
Hence, the brokerage estimated that despite facing soft demand, the manufacturer is ahead of its rivals in managing potential headwinds, like pricing pressures from a stronger ringgit and higher wage costs, through improved operational efficiency and a richer sales mix.
“Demand in the Japanese market, which we estimate at 15% to 20% of total sales, has also increased, boosted by a stronger yen and better consumer spending, enhancing sales of garbage bags and kitchen bags, raising its current utilisation rate to 70%,” it noted.
Maintaining its earnings forecast on Thong Guan, Kenanga Research said “every 10% rise in the ringgit against the dollar should only impinge its earnings by 3% and thus we believe this price weakness would be an accumulation opportunity”.
“Although there is a timing effect, there may be an initial compression of margins as existing inventory that was bought on higher dollar cost gets cleared out, before the benefit of cheaper resin cost in ringgit terms is reflected,” the research house added.
Kenanga Research reiterated its “outperform” call on Thong Guan with a target price of RM2.80 per share.
