Our positive view on Tomypack is premised on lower raw material prices, improvements in efficiency, higher production capacity and resilient demand in the food and beverage industry. We derive aMYR2.17 TP (13.5x FY16F P/E, 17% upside) which implies a 25% discount to its closest peer, Daibochi Plastic & Packaging Industry (Daibochi) (DPP MK, SELL, TP: MYR3.80).

• A flexible packaging producer in Malaysia. Tomypak Holdings (Tomypack) was established in 1979 as a flexible food packaging materials producer in Johor. It has a plant located in Kawasan Perindustrian Tampoi, Johor with a total floor size of 150,890 sq ft and an annual production capacity of 17,500 tonnes.
• Inelastic demand. Over 90% of products produced by Tomypak are for the food and beverage packaging industry. The company supplies flexible packaging products to multinational corporations (MNCs) in the food industry. The food and beverage industry is generally more resilient and hence, we expect demand for flexible food packaging products to remain relatively inelastic in periods of economic downturn.
• Improvement in efficiencies & greater cost saving. The company is improving its existing production capacities through investments in new production machineries with more automation processes and higher output. Tomypak has installed and upgraded its camera inspection machines to detect quality defects for its products. This has allowed the company to cut down on wastage by over 30% on a monthly basis.
• Capacity expansion. In Oct 2014, the company acquired 10.5 acres of industrial land in Senai for MYR11.7m. The company is planning to build a new plant for capacity expansion in 2015-16. The expansion may allow the company to meet its current and future demand of the growing clientele and possibly to cater to new markets.
• We derive a MYR2.17 TP based on FY16F P/E of 13.5x, in-line with its 2-year average historical P/E. This implies a 25% discount to its closest peer, Daibochi (DPP MK, SELL, TP: MYR3.80) which trades at a 2-year average historical P/E of 18x.
• Risks. i) fluctuation in the prices of raw materials, which are linked to oil price movements; ii) unfavourable forex movements; iii) loss of contracts from key customers.

Investment Thesis New management to take the lead. Tomypak was founded by the Chow family in 1979. In Oct 2014, the Chow family sold the block of shares totaling 27.9m shares (25.4% stake in the company) to New Orient Resources. This mark ed the exit of the Chow family from Tomypak as key shareholders. Currently, the company is led by Mr. Lim Hun Swee (Managing Director), who was previously a non-independent nonexecutive director of Tomypak. He has more than 20 years of experience in the food industry. He was the Managing Director of In-Comix Food Industries Sdn Bhd and retired from the position in July 2009.

Improvement in efficiencies & greater cost saving. The company is focused on improving its existing production capacities through investments in new production machineries with more automation processes in order to ahiceve higher output. Mr. Lim has also implemented a series of cost saving exercises upon his appointment as the managing director of Tomypak since 2014. Among others, the company has installed and upgraded camera inspection machines to detect quality defects for its products. This move managed to cut down wastage by over 30% on a monthly basis. The company aims to further reduce its monthly wastage by 50% over the longerterm.

Lower raw material costs. On the external front, the lower crude oil prices (YoY) are favourable to the company. Raw materials account for 70-80% of its total costs. Its main inputs such as films and printing materials are positively correlated to crude oil price movements. Management guided that the raw material prices in 1QFY15 were generally 10% YoY lower compared to 1QFY14. Based on Bloomberg data, two of its key raw materials – polyethylene (PE) and polypropylene (PP) saw 1Q15 average prices that were 22.1% YoY and 29.0% YoY lower respectively.

Inelastic demand. Over 90% of the products produced by Tomypak are supplied tothe food and beverage packaging industry. The company supplies flexible packaging products to MNCs in the food industry. Along with the change of lifestyle, whereby consumers prefer smaller packaging for easier consumption and greater mobility, we believe that the demand for flexible packaging should remain encouraging. The food and beverage industry is generally a resilient business. Hence, we expect demand for flexible food packaging products to be relatively inelastic during periods of economic downturns.

Future expansion. In Oct 2014, the company acquired 10.5 acres of industrial land in Senai for MYR11.7m. Currently Tomypak has a plant located in Kawasan Perindustrian Tampoi, with total production capacity of 17,500 tonnes per annum. The group is planning to build a new plant for capacity expansion. This expansion plan will allow the company to meet its current and future demand of the growing clientele and possibly to also cater to new markets. As the expansion plan is still at drafting stage, no information is available on additional capcity at this juncture. However, we believe that the additional capacity will only come on stream by end of 2016 or early 2017.

Valuation & Key Risks We derive a TP MYR2.17 implying a 17% upside potential. Our TP is based on FY16F P/E of 13.5x, in-line with the company’s 2-year average historical P/E. This also implies a 25% discount to its closest peer, Daibochi’s (DPP MK, SELL, TP: MYR3.80), which trades at a 2-year average historical P/E of 18x. We believe that the lower valuation is justified as Daibochi is the largest flexible packaging player in Malaysia with a market capitalization of MYR485m, more than double Tomypak’s

Peer comparison. The closest peer of Tomypak is Daibochi, which is also involved in flexible packaging solutions. In terms of P/BV valuation, Tomypak is trading at a lower multiple compared with Daibochi. Based on P/E valuation, Tomypak trades at higher P/E of 23.6x, versus Daibochi’s 20.3x in FY14. However, we believe that Tomypak’s strong earnings growth in FY15-16F, driven by operating efficiencies, should help compress its P/E valuations quickly. Hence, we expect the company to trade at approximately 12.7x P/E by end FY15F.

Financial Overview Historical performances. Despite reporting a lower revenue of MYR159.1m (-13.0% YoY) in FY09, the company was able to post a higher net profit of MYR20.0m (+12.6% YoY), primarily due to a sharp fall in crude oil prices during the year. Meanwhile, the subsequent economic recovery in second half of 2009 resulted in higher orders. In FY10 and FY11, Tomypak posted lower earnings despite higher revenues. This was a result of higher raw material prices. In FY12, the company managed to chart a higher profit of MYR17.3m, thanks to better sales mix, lower production costs and improved efficiency. Tomypak reported a record-high revenue of MYR224.5m in FY13 due to higher export sales. Nevertheless, net profit was lower at MYR14.2m. This was attributed to higher raw material and labour costs as a result of the implementation of minimum wage policy in Malaysia.

Source: RHB Research - 19 May 2015