Kenanga Research noted that Thong Guan has ventured into developing commercial properties, which should enhance its medium-term earnings.
PETALING JAYA: Leading stretch film manufacturer Thong Guan Industries Bhd
remains poised to grow in Europe and the United States in the longer term, thanks to product innovation.
The company recently participated in the Pack Expo in Chicago and the Scan Pack Expo in Sweden.
It showcased its innovative stretch film technology designed to optimise packaging for sustainability and cost efficiency for the users here.
In a note, Kenanga Research said these efforts were part of Thong Guan’s strategy to penetrate deeper into the European and US markets.
“We believe Thong Guan can expand its market share through cutting-edge technology and proactive marketing, research and development and mobile load stability testing capabilities to provide assurance to new buyers.”
Although currency swings can affect Thong Guan’s margins, especially in the short term, the research house believes the impact will be more muted over time.
Thong Guan generates over 80% of its revenue from US dollar-denominated exports.
However, its biggest production cost item is resins, which is largely traded in US dollars as well, thus providing a natural hedge in the longer term.
Additionally, the company’s focus on high-margin products like nano stretch film has led to improving margins which should further insulate Thong Guan from smaller currency fluctuations.
Kenanga Research also noted that Thong Guan has ventured into developing commercial properties, which should enhance its medium-term earnings.
However, it is not expected to have a substantial impact on annual earnings, as an overall project gross development value of RM200mil to RM300mil is not very large and the project is expected to be stretched over three to five years.
On the recently announced financial results, Kenanga Research said the core net profit of RM58mil in the first nine months of financial year 2024 missed its expectation at 62% of its full-year forecast and 66% of the full-year consensus estimate.
The key variance against its forecast stemmed from higher-than-expected cost pressures, lower average selling prices and foreign exchange losses.
“We cut our earnings for the financial year 2024 (FY24) and FY25 by 5% and 8%, respectively, to reflect higher cost pressures.
“We cut our target price to RM2.58 (from RM2.80) based on an unchanged 11 times FY25 price-to-earnings ratio (PER), at a discount to the sector’s average historical forward PER of 13 times to reflect Thong Guan’s low share liquidity,” it said.
Despite the lower target price, Kenanga Research has maintained its “outperform” call on the stock.
“We believe the recent drop in its share price is also due to investors’ concern on volume growth.
“However, innovative initiatives by Thong Guan may act as a re-rating catalyst as soon as it successfully gains more market share in the advanced economies.”
