Earnings improvement foreseen for NTPM in coming quarters

TheEdge Tue, Sep 25, 2018 10:49am - 5 years View Original


NTPM Holdings Bhd
(Sept 24, 54 sen)
Maintain buy with a lower target price of 62 sen:
NTPM Holdings Bhd’s core net profit of RM6.6 million for the first quarter ended July 31, 2018 (1QFY19) was below expectations, after reaching only 14% of our forecast. The negative deviation could be attributed to lower-than-expected sales from its personal care product segment and our overly optimistic cost assumptions.

Year-on-year (y-o-y), 1QFY19 revenue declined marginally by 2% to RM172 million on lower personal care product sales (down 6%), which we believe was due to intense competition in the market. Its 1QFY19 core net profit dipped 46% y-o-y, dragged by higher raw material costs, which included virgin pulp and wastepaper.

Moving forward, we expect earnings to improve in the coming quarters, with the aid of price increase effects. We understand that its major competitors have followed suit, as the price increase was to pass on higher raw material prices that affected the whole industry. As such, we do not foresee sales volume to be impacted significantly, especially given the inelastic demand its products enjoy as necessity consumer goods.

Meanwhile, NTPM is expanding the production capacity of both its Malaysian (to 110,000 tonnes from 100,000 tonnes per year) and Vietnam (to 50,000 tonnes from 10,000 tonnes per year) plants by end-2018. This should underpin its longer-term earnings growth, in our view.

We continue to like the company for its status as the leader in the local tissue paper market, backed by its established brand names and proven track record — these attributes are essential for NTPM to weather near-term challenges, such as high raw material costs, which could continue to pose downside earnings risks.

The stock is trading at an FY19 price-to-earnings estimate of 14.5 times, below its five-year mean of 16 times. We believe the valuation is undemanding given the company’s solid fundamentals with an experienced management team, anticipated earnings recovery and long-term expansion plans to sustain earnings growth. Post-results, we trim our FY19 to FY21 net profit forecasts by 3% to 8% to account for more realistic cost assumptions.

Risks to our recommendation include higher-than-expected input costs and unexpected delays in expansion plans. — RHB Research Institute, Sept 24

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