Thursday 24 December 2015

Differing Views on Tomypak

I wrote about Tomypak in early October when the share price was RM2.39. It touched a high of RM3 on 18 Nov 15. The share price underwent correction and closed at RM2.64 on 23 Dec 15.

CIMB is the only broker covering Tomypak currently. While I am positive on the outlook of the company, CIMB was quite skeptical on the margin improvement and its expansion plan. It is alright to have differing opinions as long as the reasoning is sensible.

The 2 latest reports by CIMB (for registered users only) can be found here:
Running to far ahead dated 26 Nov 15
Over-ambitious 10-year capex strategy dated 13 Dec 15

1. Earnings beat expectation, higher dividend payout, raised earnings forecasts but cut target price
The first report dated 26 Nov 15 was 3Q15 results note. Tomypak reported:
i. net profit above CIMB's expectation
ii. profit margin recovery continues
iii. dividend payout for 9M improved from 4sen/share to 7sen/share

Subsequently, CIMB raise its FY15-17 EPS forecasts by 4-6% to reflect further profit margin recovery.

Despite the good set of results and earnings upgrade by the CIMB, the same broker surprisingly cut the target price from RM1.96 to RM1.84! It didn't seem to jibe. Perplexing...

2. Profit margin recovery mystery?
CIMB was perplexed by Tomypak's sharp profit margin recovery as the broker opined that operational improvements are usually in baby steps, not triple jumps. According to CIMB, both Daibochi and Tomypak have similar customers and, as such, profit margins from sales should be relatively similar.

From the same report, similar margin improvement could be observed in 2008 and EBITDA margin of slightly above 20% was also seen in early 2009. So this was not a margin that had not been seen before. Furthermore, the margin improvement came from a low base.

The broker was unsure how the company's profit margin recovered so quickly since the entry of a new major shareholder in 4Q14.

Mr. Lim Hun Swee was re-designated as an executive director in August 2014 and subsequently as a Managing Director on 1 January 2015. Mr. Lim Hun Swee is a veteran in the food industry. According to Bloomberg, he also served as an Executive at MNC Wireless Berhad, Hup Seng Industries Bhd., eBworx Bhd, OSK Holdings Bhd., HLG Capital Bhd, Global Soft Bhd, ISS Consulting Solutions Bhd. Mr. Lim served as Managing Director of In-Comix Food Industries Sdn. Bhd. until July 2009. He has 20 years experience. He has been a Non Independent Executive Director of Tomypak Holdings Bhd since August 13, 2014 and served as its Non Independent & Non Executive Director from May 23, 2014 to August 13, 2014. Mr. Lim has been an Executive Director of Johore Tin Bhd since July 1, 2012 and its Non Executive Director from August 26, 2010 to July 1, 2012.

Mr. Lim has been increasing his stake in Tomypak since he took over the executive role in Tomypak and this could be a sign of his confidence in the prospects of the company.

If the earnings were not real, how the group paid for RM12m land purchase, part of the capex for factory expansion and increased dividend payout?

3. Were the "facts" in the reports right?
Its report dated 26 Nov 15 stated the company geared up to finance the set-up of a new factory, which would double existing plant capacity.

In The Edge Weekly dated 20 July 2015, Tomypak is planning to build a new plant with an annual production capacity of 35,000 tonnes on 10.5 acres of industrial land in Senai, Johor. Its existng plant in Tampoi, Johor Bahru, which has a production capacity of 17,500 tonnes, is running at a utilisation rate of 80%. It should be tripling of capacity instead of doubling the capacity.

Separately in CIMB report dated 13 December 2015, it wrote in Phase 1, Tomypak hopes to double its production capacity by end-2016. The Edge Weekly dated 14 December 2015 (available 12 December 2015) highlighted Tomypak has a planned capex of RM120m to RM140m for its three-phase new factory project. Each phase will provide 12,000 tonnes of additional capacity per annum. It will be two-thirds increase in existing capacity instead of doubling capacity.

4. Expansion long overdue or overly ambitious?
On expansion, CIMB in the report dated 26 Nov 15 commented the building of a new factory is a long overdue exercise as the existing factory has insufficient space, and added that Tomypak should have done this expansion a few years ago.

But when Tomypak revealed its plan to triple its capacity in 10 years (at CAGR of 11.6%), the broker raised its doubt whether the expansion plan was overly ambitious.

While it is true that overseas MNC customers are very sticky and it could take a minimum of 2-3 years for them to switch suppliers, Tomypak could possibly secure additional orders from its existing MNC customers. Central procurement is common in MNCs. Tomypak which has significant revenue generated from overseas markets, may gain market share through its existing MNC clients. The additional orders from overseas markets could be very sizeable.

5. Imposed steep discount to a superior player?
Compared with Daibochi, Tomypak is superior in term of margin, ROE, ROA, lower gearing, better trading liquidity and growth potential. Not only a steep discount imposed on Tomypak's target PE multiple puzzling, CIMB widened the discount from 30% to 40% in its report dated 26 Nov 2015 when earnings beat expectation, margin continued to improve, and dividend payout increased was even more baffling!

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