TOMYPAK - TOMY Packs His Right Path

TOMYPAK company in Johor. Credit to my friend CKH for taking the photo. 

TOMYPAK continues to focus on its core resilient business. Around 90% of the Group's revenue is derived from the recession-resilient food and beverage sector. Being a necessity item especially in food and beverage industry, TOMYPAK management believe that the demand for flexible packaging will remain strong and growing[4]. Actually what is flexible packaging? By clicking on these video (Video 1 & Video 2), i think you will be able to understand how flexible packaging works[2][3]. In short, flexible packaging is actually a package or. container made of flexible or easily yielding materials that, when filled or closed, can be readily changed in shape. The construction may be of paper, plastic film, foil or any combination of these. 

Some samples of plastic packaging

Flexible packaging is no longer perceived as a simple wrapping material, but also as a decorative, protective and presentable tool to consumers while on display in the market[1]. TOMYPAK was established in 1979, public listed in 1996 in BURSA. TOMYPAK's packaging product classifications include: premium packaging (powdered beverage), high barrier metalized packaging (seasoning, powdered beverage), hot fill packaging (mayonnaise, sauces), general packaging (confectionery, instant noodles, snacks) and specialty (pet food, detergent). There are a lot of big clients, such as, Maggi, Nestle, Mamee, Yeo's, Oriental Food Industries, Apollo, Milo, Vico, Horlicks, Ajinomoto, Babas, Lady's Choice, etc. Now, looking back at the big clients profile. Milo and Maggi, the demand is still there. That's why Mr Chairman mentioned that the demand is still there as these food are recession-resilient food and beverage.

TOMYPAK main clients

1) Fundamental Analysis: 

Revenue and Net Profit from 2011 to 2015

TOMYPAK's revenue and net profit is not consistent. In 2014, TOMYPAK recorded a lower revenue due to decrease in demand in the local market. The net profit decreased 42% due to lower sales in local market coupled with competition in the export market and the increase in cost of production arising from higher energy and labour cost[4]. But surprisingly for 2015, the net profit spiked up 181% to RM23,162k due to better sales of mix and continuous improvement in production efficiency and FOREX gain[5]. 

TOMYPAK's dividend policy is distributing at least 40% of the net profit, promising dividend every quarter, making the DY as high as 4.09%. In the Annual Report Chairman Statement, Mr Chairman, Tan Sri Dato Seri Utama Arshad bin Ayub promised on the improvements on its existing production capacities by investing in new production machinery with higher output and more automation, improving the production process, sourcing new materials and creation of new formulations and innovative products. The improved production process include various on-going cost saving measures to reduce cost of production[4][6]. For me, these are at least the minimal actions required in order to sustain the profit of the company. In the last Quarter of 2014, TOMYPAK actually commissioned 1 unit of advance lamination machine to enhance production capabilities and reduce materials wastage[4]. They also invested in an freehold industrial land of 10.5 acres at RM11.69 million for future expansion purpose[7]. The company never shows sign of slowing down despite of the economic slow down, they are still pushing their boundaries to lead the market in the packaging industry.

TOMYPAK Rights Issue

TOMYPAK is optimistic that the demand for the group products from the food and beverage sector will still remain favourable. Recently, they had proposed rights issue with free warrants[6]. Rights issue is an activity by the company to seek help from investors for money. In TOMYPAK's case, the money will be used for business expansion. TOMYPAK is expected to raise minimum RM27.438 million to maximum RM54.734 million. Around 61% of the rights issue will be used for construction of a new factory building, 29% will be used to purchase machineries, equipment and other anciliary facilities, 9% will be used for working capital while 1% will be used for the rights issues expenses.

Utilization of proceeds page 6 [6]

We can dig for more information in the Notes. Briefly summarize, the new construction of factory building is located in Mukim Senai, District of Kulaijaya, with a total built up area of approximately 265,335 square feet, which is 90% larger than their current factory (140,000 square feet). As TOMYPAK is indirectly related with food and beverage industry, their new building is designed to comply with the international hygiene and food safety standards.

TOMYPAK will have a larger and more sophisticated Research and Development (R&D) equipped with the latest computerised testing equipment. The R&D labs will be equipped with advanced technology facilities for inspection and quality control. Another key point to note, TOMYPAK plans to produce its own raw material plastic films using its own brand name. In 2016, they will develop more specialised packaging application with high quality products such as packaging for infant cereal and milk powder for local and overseas market. For me personally, R&D will add extra marks to the valuation of a company. R&D will always try to bring out the best from the product. If it succeeds, it will be a big hit in the industry.

Quality Assurance and R&D

With the finish construction of the new plant, TOMYPAK will have additional 1 production line in its new factory. Currently it is operating with 7 production lines. The production capacity will increase from 19,200 metric tonnes per annum to 24,960 metric tonnes per annum.

As for the machineries, the critical feature of the new production facilities will be the enhanced multiple-proof colour capability which makes the process faster as compared to the existing machineries. Just to name out some of the machines, such as, advanced printing machine, advanced extrusion lamination machine, slitting machine, resin mixer, paper cutter and other equipments. As for the working capital, TOMYPAK will purchase raw materials such as plastic resin, aluminium foil, plastic film, printing ink and etc. With low crude oil price, plastic resin can be bought with lower price. Of course, if the money is still not sufficient to carry out all the works, they will seek for internally generated funds or bank borrowings. Everything is written quite detailed in the Note[6].

For some rights issue calculation, one rights issue will be given for every two TOMYPAK shares held. The issue price of the Rights Shares is at RM1.00 per Rights Shares. And the rights issues subscribed will be given a free warrant. The exercise price of the TOMYPAK warrant is 2.29. To simplify, if you hold 2 TOMYPAK shares, you will be given 1 rights issue. If you subscribe the rights issue, you need to pay RM1,000 to own it and your 1 share of right issues will exchanged with a free warrant. After the rights issue, the mother share will be adjusted.

Imagine a case, if we hold 2,000 shares of TOMYPAK. TOMYPAK shares closed at 2.50 before the ex date. In the next day, our TOMYPAK (2,000 shares) price will be adjusted to 2.00 and we will be entitled with 1,000 shares of right issues. It can be identified with TOMYPAK-OR. If we were to subscribe for the rights issue (TOMYPAK-OR), we need to invest another RM1,000 to the investment bank in order to be entitled for 1,000 shares of free warrant (TOMYPAK-WA). If we do not want to subscribe the rights issue, we can sell it off in the market just like normal shares.

2) Technical Analysis:

TOMYPAK Weekly Chart

TOMYPAK had been in a downtrend from November till now after a uptrend for 28 weeks. Please take note that the graph above is a weekly chart. Do notice in the mid of November, there is a huge selling pressure when the stock had been overbought for a few weeks, followed by a huge selling candle and a bearish engulfing. That week is the announcement of Q3 result. So, we can assume after they announce the Q3 result, which saw an improvement of 4% from preceding quarter, investors start to take profit and cause the drop. After reaching the highest price at 3, TOMYPAK continues to slide until now. Until recently we saw it rebounded after it touched the support at 2.30. I had drawn a Fibonacci Retracement from 1.86. Why 1.86? A support is normally drawn when it combines points together, that is how normally i draw my supports and resistances. By following the Fibonacci Retracement, the next resistances will be 2.70 and 3.00 respectively. The MACD is still has not shown any golden cross.

I am attracted to TOMYPAK purely because of its business model and future expansion plan. But again, the market seems to rebound when our Crude Oil Price is going up and our Ringgit strengthened. When that happens, our FBMKLCI had been pushed up. And almost all of the export stocks had dropped due to a panic sell down by the investors. TOMYPAK will be slightly affected as the overseas sales is 55% of 2015 revenue.

3) Projection Analysis:

A simple peer comparison had been compared between TOMYPAK and DAIBOCI. TOMYPAK's market capitalization is RM267 mil while DAIBOCI's market cap is RM601 mil. From the market cap, DAIBOCI is bigger than TOMYPAK. That is why DAIBOCI's (blue line and blue bar) revenue and net profit is higher than TOMYPAK's (green line and green bar). 

Peer Comparison between TOMYPAK and DAIBOCI

TOMYPAK vs DAIBOCI in Net Profit Margin and PE

DAIBOCI's result is more consistent compared to TOMYPAK. The average for net profit margin for TOMYPAK and DAIBOCI is 7% and 8% respectively. TOMYPAK's PE is more attractive if compared to DAIBOCI. For the comparison, i will leave it to you to decide. However there are some homework or analysis done by Bursa Stock Talk and nexttrade[8][9]. Have a read and analyse yourself.

Now let's project the price of TOMYPAK (before the rights issue):
The EPS for TOMYPAK in the Q4 2015 is 21.18 cents.
We take the average PE between TOMYPAK and DAIBOCI, which is around 14.
Hence, the projected price = 21.18 x 14 = RM2.96 which is also around RM3.00, our resistance in the technical analysis.

Summary:

TOMYPAK slowly will show his true colour in another 2 years time. When its factory had been finished constructed, whereby there will be an additional production line. With its involvement in the flexible packaging for recession-resilient food and beverage sector, i believe that TOMYPAK can be a long term counter, provided with more steady and stable market.

- Provides flexible packaging for big clients such as NESTLE, MAGGI, MAMEE, MILO, LADY's CHOICE etc.

- Packaging product classifications include: premium packaging, high barrier metalized packaging, hot fill packaging, general packaging and specialty.

- Inconsistent with its revenue and net profit. 2015 presented 181% higher net profit than 2014 due to better sales and continuous improved in production efficiency and FOREX gain.
- Currently raising Rights Issue for business expansion in a freehold industrial land bought in Q4 of 2014.

- Business expansion plans include focus on improvements on its existing production capacities through investments into new and more advanced production machineries for higher output, automation and better efficiencies.
- Improve its production process by sourcing of new materials, and creation of new formulations, designs, customisation and innovative products to ensure the products are in the highest quality.
- A thing to note here is the R&D plan. The R&D labs will be equipped with advanced technology facilities for inspection ad quality control. TOMYPAK plans to produce its own raw material plastic films using its own brand name and provide more specialised packaging for infant cereal and milk powder to cater for local and overseas market.
- With its completed building, the production will increase from 19,200 metric tonnes per annum to 24,960 metric tonnes per annum.
- From technical point of view, TOMYPAK had been in downtrend after reaching the highest point of 3.00. Recently rebounded when price reach the Fibonacci Retracement of 61.8%. Had supports at 2.30 and 1.86 respectively and resistances at 2.70 and 3.00 respectively.
- The valuation of TOMYPAK is more attractive if compared to its peer, DAIBOCI. By using average PE at 14, the projected price is at 3.00 which is similar to the technical analysis.
- The main things that attracted me are the business model (flexible packaging for the F&B industries) and its business expansion in the rights issue document.
- Respect the cut loss point very much during the volatile market. 

TOMY packs his right path after the rights issue?

Let's Ride the Wind and Gainvest

Gainvestor 10sai

6 March 2016

3.31pm

Sources:

[1]: http://www.tomypak.com.my/
[2]: Flexible Packaging: https://www.youtube.com/watch?v=vU4rQdy9WJM
[3]: Flexible Packaging: Packets, Sachets, Pouches, Wrappers, Stick Packs: https://www.youtube.com/watch?v=fXTKX4ms3PM
[4]: Annual Report 2014

[5]: Q4 2015
[6]: Rights Issue News: http://www.bursamalaysia.com/market/listed-companies/company-announcements/4986409
[7]: Purchase of land: http://www.bursamalaysia.com/market/listed-companies/company-announcements/1114825
[8]: Bursa Stock Talk: http://bursastocktalk.blogspot.my/2015/10/tomypak-turning-over-new-leaf.html
[9]: nexttrade: http://nexttrade.blogspot.my/2015/08/tomypak-profits-up-but-revenue-down.html