Soft Top Line, Higher Operating Cost Exert Pressure On Thong Guan’s Earnings: Kenanga

Thong Guan Industries (TGUAN)’s quarter one financial year 2023 core net profit came in at only 18% of both Kenanga Research’s full-year forecast and the full-year consensus estimate. The key variances against their forecast came from a soft top line but higher operating cost, particularly, staff and utility costs.

Year-on-year, quarter one financial year 2023 revenue dropped by 6% due to lower average selling prices (ASPs) across the board in tandem with the decline in raw material prices amid a slowdown in the global economy for its plastic packaging segment (-8%), partially cushioned by its sales to the food and beverages segment (+20%). Net profit declined by a larger 15%, weighed down by higher labour and utility costs, said Kenanga Research (Kenanga) in a recent report.

Quarter-on-quarter, quarter one financial year 2023 revenue held up as demand and ASP stabilised sequentially. However, net profit declined by 25% as a better product mix that skewed toward higher margin products was unable to cushion higher overheads as mentioned.

The demand outlook for the plastic packaging sector in 2023 appears favourable, especially for the first half calendar year 2023, dampened by slower global economic growth.

“As such, we believe TGUAN will expand its capacity at a measured pace and grow its client base to enable it to gain market share from overseas competitors. We understand that it made a rather impressive debut in the recent “Interpack” plastic and packaging trade fair in Düsseldorf, Germany,” said Kenanga.

TGUAN will continue to expand its capacity by installing more stretch and blown film machines in its 16-acre plant to secure more orders, and actively seek potential customers. TGUAN revealed that its current utilisation rate is at 65%-70%.

Kenanga favours TGUAN for the growth potential of the local plastic packaging sector as Malaysian players like TGUAN are gaining
market shares from overseas producers that are losing their competitiveness due to the rising production cost.

Also, TGUAN’s earnings stability is underpinned by a more diversified product portfolio, and its expansion plans for premium products, such as nano stretch films, courier bags, food wraps and some industrial bags.

Risks identified by Kenanga are the sustained higher resin cost, the demand for packaging materials hurt by a global recession, and prolonged labour shortages.

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