Tomypak Holdings Bhd
(Jan 17, 69.5 sen)
Maintain underperform with an unchanged target price (TP) of 49.5 sen: We visited Tomypak Holdings Bhd’s new factory, located in Senai, Johor, on Wednesday and came away feeling comforted by the progress of its capacity expansion plan.

The Senai factory is the group’s second factory, with a current capacity of 34,000 tonnes/year (265,000 sq ft) versus the first factory in Tampoi, Johor (6,000 tonnes/year on 150,000 sq ft).

This brings Tomypak’s total capacity to 40,000 tonnes/year, which is higher than our estimated capacity of 32,000 tonnes/year for financial year 2019 (FY19).

We initially expected slightly slower expansion progress, but management decided to expedite the expansion plans.

Going forward, we do not expect new capacity expansion till FY21 while we believe management is strongly focused on increasing the existing utilisation rate of 46%.

Having invested a total capital expenditure (capex) of RM166 million in the new Senai factory over the past three years, the production lines consist of a film casting line, rotogravure printing lines, a flexo printing line, dry lamination lines, extrusion lamination lines, vacuum metalising line and 16 slitters.

Moving forward, we expect lower capex of RM10 million for FY19 (versus RM30 million previously) as management indicated that there is no more new addition to equipment while capex will be more on maintenance.

The recent cumulative nine months of FY18 (9MFY18) results saw margin being compressed from 7.5% in 9MFY17 to 2.5% in 9MFY18.

The main reasons for the compression were attributed to: i) lower average selling price arising from steep competition; ii) higher raw material costs; iii) higher depreciation expenses from purchases of new equipment for the Senai factory; and iv) higher financing costs from increased borrowings drawn down to finance the purchase of new equipment.

We do not foresee any significant improvement in margins for FY19 as we believe raw material prices will remain volatile.

However, we may seek to upgrade our margins assumption upon stronger signs of margin improvement in coming quarters.

For FY19, management indicated that efforts are being made to expand its revenue streams in both local and overseas markets.

As such, we conservatively estimate a slightly higher FY19 utilisation rate at 50% on capacity of 40,000 tonnes/year (versus 49% utilisation on 32,000 tonnes/year capacity previously).

We increased our FY19 estimate earnings by 35% to RM3.8 million (assuming 50% utilisation on 40,000 tonnes/year capacity) but make no changes to our FY18 estimates (45% utilisation on 28,000 tonnes/year capacity). — Kenanga Research, Jan 17