(March 22, 75 sen)
Not rated at 73 sen with fair value of 96 sen: GW Plastics (GWP) was incorporated in 1971 as a manufacturer of plastic packaging products such as shopping bags and plastic sheets for general household and consumer use. GWP was originally listed on Bursa Malaysia in 1993, before its listing status was transferred to Encorp in a restructuring exercise in 2003, which resulted in GWP becoming a wholly owned subsidiary to Encorp. In 2004, Encorp sold off GWP to Megastart and Keybumi. GWP has evolved into a manufacturer of higher quality value-added flexible packaging films such as printed films, wicketing bags and specialty films. The group operates from its factory in Rawang, which sits on 28.6 acres of land, with a current annual extruding capacity of circa 50,000 tonnes per annum.
FY10 net profit grew 38.6% year-on-year (y-o-y) to RM21.2 million on the back of revenues of RM308.2 million (+20.1% y-o-y). Revenue growth was due to increased production volume coupled with increased average selling prices for both its cast films and blown films. Production volumes for its cast films increased 15% y-o-y, while blown film production volume increased 9.4% y-o-y, while selling prices increased 7.9% and 13% for cast and blown films respectively. Despite the challenge of rising raw material prices in 2010, GWP still managed to expand its profit before tax margins by 0.5 percentage points to 7.9% in FY10, mainly due to better product mix for its blown films (which is reflected by its higher average selling prices for blown film products), coupled with the cost-pass-through traits of cast films.
For 2011, we expect that GWP’s revenue growth would be driven by aggressive capacity expansion, which we estimate would effectively increase its overall production capacity by 25.5% y-o-y. We understand that by end-FY11, GWP would have a total estimated combined production capacity of 62,000 tonnes (2010: circa 47,100 tonnes).
The risks include: 1) sharp increase in raw material prices ie plastic resins; and 2) drop in demand for plastic packaging materials.
We believe GWP’s current valuations are attractive as it is only trading at six times FY11 PER, as compared its peers weighted average FY11 PER of 7.3 times.
Furthermore, its current share price of 73 sen is lower than its listing price of 76 sen, which we believe is due to investor fears over the plastic packaging sector being overwhelmed by higher input prices from rising crude oil prices, coupled with GWP’s newly listed status. Our indicative fair value for the stock is 96 sen, based on target FY11 PER of eight times, a 10% premium over its peers weighted average FY11 PER. We believe the premium is fair given GWP’s clarity in terms of its topline growth projections, and to a certain extent its earnings visibility. — RHB Research, March 22
Written by Financial Daily
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