Retain outperform with unchanged target price (TP) of RM4.00
- Strong pick-up in lunch boxes. In view of the regulatory bans on polystyrene foam packaging in several states effective next year, there is increasingly strong demand for the biodegradable lunch boxes. It registered RM2m sales for the lunch boxes in the recent quarter compared to RM1.4m in 1QFY17, a healthy 42% QoQ growth. During the quarter, it also added 34 new local customers and 6 new international customers (Singapore, Australia, China, Indonesia and Philippines). The F&B industry (+18% YoY) made up 79% of 2QFY17 revenue followed by extrusion sheets (+6% YoY) at 12% and cups (+238% YoY), 9%. For the 1H, local sales accounted for 58% of the total sales while remainder came from exports.
- Price revision for all product selling prices. Effective 20 Dec 2016, the group will revise the selling prices of all its plastic packaging products by 10% to offset the recent spike in resin cost, which makes up more than 50% of its total production cost. Resin prices have increased more than 6%-12% since November in tandem with the recent rebound in crude oil prices. This is also the first price revision in more than 2 years. Management also guided that it will review its product selling prices every 6 months in view of the recent surge in oil prices.
- Rented premise has started commissioning. While waiting for the new plant to come on-stream by end-2018, management has rented a 20,000 sq ft premise in Kulai to temporarily house 2 extruders and 4 thermo-forming machines at a total capex of RM3.8m. Two extruders and two thermoforming machines are running while the other thermoformer will be operational 4QFY17. The rented premise will accommodate a total extrusion capacity of 8.2m kg/year. Meanwhile, there will be a dual-colour extruder installed at its existing plant, and expected to contribute an additional extrusion capacity of 2.8m kg/ year. All-in, it will increase the group?s total extrusion capacity from 25m kg/year to 36m kg/year by end-FY17.
- Updates on the new plant. Management has allocated RM125m for land acquisition and construction of the new plant, which will further increase its extrusion capacity from 36m kg/year to 62.6m kg/year. Construction activity is expected to commence in February 2017 and will take about 12-13 months to complete. About RM11.8m has been invested the land acquisition. As demand continues to pick up, management also plans to rent another premise to temporarily meet the demand for lunch boxes.