Accelerating earnings
Price: RM2.33
Market cap: RM387.9 mil (shares outstanding: 166.499 mil)
Driven by its new plant, Malaysia’s 2nd largest flexible packaging player Tomypak could potentially see its earnings grow 30% each year from 2017-2019.
Tomypak's new plant at Senai, Johor
Source: Tomypak annual report 2016
Tomypak's first printing line (5,000 tonnes annual capacity) at its new plant in Senai, Johor has started operations in April 2017. After two more lines are installed at the Senai plant, Tomypak is expecting to double its production output (from ex-Senai plant levels).
How much impact to earnings could the new line have?
As a guide, let’s look at Tomypak’s 2015 and 2016 revenue and production volume. Latest annual report shows (page 8):
2015: RM214.1 mil revenue and 13,055 tonnes total volume sold
2016: RM210.9 mil revenue and 12,833 tonnes total volume sold
From this we can see that revenue per tonne was RM16,400 in 2015 and RM16,437 in 2016. Of course, moving forward this figure depends on product sales mix, ASP, etc.
(Refer to table below) If the new 5,000 tonnes production line runs at 90% capacity in 2018, it could potentially contribute revenue of RM73.8 mil (based on revenue per tonne of RM16,400).
Two more printing lines are to be installed over next 3 years to the end-2019, according to the Tomypak’s annual report 2016 (page 10).
Based on this, I’m expecting line 2 to be installed somewhere in 2018 and line 3 in 2019. Total capacity of the Senai plant is expected to be 16,000 tonnes once all 3 lines are installed. Total capacity could be higher as line 2 could have higher capacity of 7,000-8,000 tonnes, according to a recent media article.
Tomypak’s old plant at Tampoi has a capacity of 19,200 tonnes, but given the age of the production lines, they can only run up to 60-70% of capacity.
Let’s say line 2 has a similar capacity of 5,000 tonnes and gets installed in 1Q18. For the full year 2018, if we assume line 2 contributes 50% of its capacity, that’s another RM41 mil in revenue.
So line 1 and line 2, could contribute a combined revenue of RM114.8 mil next year. If we use 2016 revenue of RM210.9 mil as a base, revenue could hit RM325.7 mil in 2018. At a blended PBT margin of 12% and tax rate of 16% (read below on tax rebate), net profit could potentially be RM32.8 mil.
I believe new and oncoming capacity should be readily taken up by Tomypak’s main customers (see section further below).
If a P/E of 17 times is applied to that 2018 earnings of RM32.8 mil, Tomypak could be valued as a RM558 mil market cap company. With 166.5 mil shares outstanding, this translates into a share price of RM3.35.
Tomypak's competitor Daibochi at RM2.70 (RM737.8 mil market cap) is trading at 19.7 times its 2018 estimated earnings of RM37.52 mil (CIMB Research forecast).
Tomypak's capacity expansion and earnings growth (hypothetical)
Note: Based on my own assumptions and estimates
Stronger profit margins
Tomypak is expected to see higher profit margins moving forward. One factor is from the reinvestment allowance for its Senai plant, whereby 60% of qualifying capex can be used to offset taxes.
A recent article on Tomypak mentioned that the company’s future effective tax rates could drop to 16-18%. Capex for the new plant (including production lines, machinery, etc.) was estimated to cost more than RM120 mil.
Assuming half or RM60 mil of that capex can qualify for reinvestment allowance, Tomypak could have RM36 mil of tax rebates it could use to offset taxes.
Another contributing factor is that the new line and future lines at the Senai plant are more advanced and efficient with higher output and automation than the lines at its old plant. So as more new lines come into play, profit margins should see improvements.
Production lines at the Tampoi plant is said to be able to only run at 60-70% of capacity because they are old (factory first started in 1988).
Banking on Nestle
Tomypak has a long standing relationship with Nestle, having been an approved vendor for the F&B giant since 1982 (page 8 of AR2016).
It is said that Nestle contributes to roughly half of Tomypak’s revenue. This does appears valid if we refer to page 98 of AR2016:
That single major customer (believed to be Nestle) accounted for RM108.5 mil or 51% of Tomypak’s total revenue in 2016.
Tomypak could be leveraging further on Nestle Group with the opening of a global procurement hub in Malaysia.
A Google search on this shows that Malaysia was selected to be one of Nestle’s global procurement hubs to meet the needs of this region, together with hubs in Switzerland and Panama (news link).
The hub will provide a range of services including procurement for packaging, according to a job ad by Nestle (see endnotes at bottom).
Potentially, the hub could open up opportunities for Tomypak to tap into some of Nestle’s growing markets in Asia.
Opportunities appear abundant with the total market for flexible packaging in Asia estimated to be worth US$20 bil, with an estimated market growth of 5% (see figure below).
Tomypak had set the base for expansion into the Singapore market as well as international expansion with the incorporation of Tomypak Flexible Packaging (S) Pte Ltd (a 70% owned subsidiary) in April 2016.
Flexible packaging market value in Asia
Source: Amcor Ltd 2017 half year results presentation (link)
In addition to Nestle, Tomypak has other main clients such as Super Group, Yeo Hiap Seng, Kraft Foods Group, MAMEE-Double Decker, Oriental Food Industries, Apollo Food, Ajinomoto and Unilever.
Tomypak's main clients
Source: http://www.tomypak.com.my/client.html
Source: Tomypak annual report 2016
New/fresh blood
Tomypak’s growth and transformation plans appear to be taking off well after new management and shareholders came on board in 2014.
Former MD and founder Chow Yuen Liong, director Chow Wen Chye, and alternate director Teo Kong Wan resigned during 2014. Tomypak then welcomed new directors: Lim Hun Swee, Tan See Yin, Yong Kwet On and To’ Puan Rozana.
In 2014, New Orient Resources Sdn Bhd (which Yong is a substantial holder of) bought over the shares from substantial shareholders equivalent to a 25.48% stake. Lim (who holds about a 16% stake now) also bought into the company in 2014.
Some cost saving initiatives undertaken by the new management:
- RM3 mil in cost savings from the realignment of production processes, including faster turnaround time of critical operational processes and various cost reduction exercises such as better utilisation of solvents and aluminium films.
- Installing QC equipment which reduced rejection rate from 1% to less than 0.5%.
- Acquired an additional unit of metalising machine to produce its own metalised film, instead of sourcing from third parties.
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ENDNOTES
1) A Nestle job description relating to the global procurement hub in Malaysia:
2) Proposed 1 into 2 share spilt. Proposed bonus issue 1 for 4. If one owns 100 shares it will eventually become 250 shares. Expected completion by 2Q17.
