Packaging Industry

In the blue corner...

TOMYPAK

TOMYPAK was recently highlighted in CIMB research house and was rated a BUY due to the favourable outlook of the company in 2010 after a stellar performance in 2009. FYE 2009 alone, their net profits surpassed their past 5 years combined profits and their dividend payment FYE2009 alone also surpassed the past 5 years dividend payments combined. TOMYPAK is involved in manufacturing of flexible aluminium packaging usually used for consumer products both locally and abroad.

Balance sheet wise, their prudent debt management has successfully turned the company around by reducing the amount of company debt from RM43 mil a year earlier to only RM17 mil where RM10 mil is short term tenures and also increased their cash levels to RM9 mil. Their EPS is a staggering 49.7 sens and they reported a NTA of RM1.83 for the last quarter. Dividends has been consistently 3 sens per quarter in FYE2009 and total dividends so far is 12 sens FYE2009. Their last dividend announcement did not indicate if it was the final dividend for the year. Previous years dividends were only once per year due to much lower profits compared to 2009.

Current price of RM3.20 means their PER is 6.4x for FYE2009 EPS. Their dividends if maintained would mean a yield of 3.75% at current prices. Their close competitor DAIBOCI which commands a 11.3x PER based current price of RM3.40 and FYE2009 EPS, has a better dividend policy of at least 50% payout.

Probably due to their recent success, their ESOS conversion has gone into overdrive increasing their total shares from 40 mil to 43 mil, about 7.5% increase since FYE2009. This will drag their EPS down by the same % and will probably continue as the company is doing well. Based on recent reported total share, FYE2009 EPS after dilution is 46.5 sens respectfully increasing their PER to 6.88x.


In the red corner...

HPI


HPI or Harta Pack Industry Resources BHD is a packaging company involve in producing and transporting corrugated boards, product package, covers, etc. Their operation also covers paper milling which contributed positively to their bottom line FYE2009. HPI also have a smaller operation in Cambodia which has so far contributed about 21% of profits for past 3 quarters (18% share FYE2009) .

Their past few years growth has been steady and EPS has already double to where it was before in 2006. Balance sheet wise, their long term debts are slowly being reduced but their short term debts has been on a rise. Cash levels in the bank only account for 21% of their current short term borrowings which can be un-healthy in a wrong situation. Recent investments include increasing their holdings in a paper mill company. FYE2009 saw a very big increase in net profits but its due to 1 time insurance payout for their factory fire in 2007 and also some reversal of provisions to bad debts.

HPI has hardly any consistent dividends to speak of with the most recent in 2009 for 2.5 sens after a long absence since 2002. I believe with a healthier dividend policy or a transparent growth plan, prices may appreciate further.

At the current price of RM1.51, PER stands at about 5.3x for only 3 quarters accumulated EPS after adjusting for bonus issue. Expected PER after 4th Quarter EPS announced is less than 5x at current prices. NTA reported in latest
quarterly report is RM2.59.

Their current low evaluations, high EPS growth values, recent bonus issue, debt levels and lack of dividends kind of put them in a "uncertain growth stock" criteria, although their growth in the last 4 years were strong, their lack of any transparent growth planning isn't fostering any faith. But HPI's ever growing EPS can't be ignored as well as their low evaluations. Their borrowings are still manageable, their profits shows no sign of abating, their cash levels every year has been positive, their operations and revenues has increased. I believe once they stabilise their cashflows as establish a consistent dividend policy, their share prices will appreciate strongly.

Compared to their peers in packaging, HPI is a laggard at share prices but business wise, their ROE is great. It does come at a price of higher borrowing though and compared to TOMYPAK which has pared down their debts and started a consistent dividend policy, HPI does deserve a lower ranking.


And the winner is...

Conclusion

Both are still lagging in terms of PER and dividends if compared to DAIBOCI, although TOMYPAK seems to be coming along. It remains to be seen if HPI can follow the steps of TOMYPAK as it is in the similar position as TOMYPAK was in FYE2008 in terms of share price, dividends and debt levels. According to HPI's FYE2009 Annual Report, their short term borrowings of RM73 mil are due within a year. So meaning this coming quarter we might see a massive reduction in their short term debts which constitutes 80% of their total borrowings.

Since DAIBOCI at PER of 11.3x is better in terms of dividends, they command the premium in valuations. TOMYPAK at PER of 6.88x is heading in that direction with a consistent quarterly dividends in FYE2009 and their share will command a premium as well if an official announcement is made regarding their dividend policy. HPI on the other hand at PER of 5x is a complete laggard, due to their lack of dividends other than 2.5 sens FYE2009 and higher debt levels.

But HPI does offer the chance to be another TOMYPAK although their products are different. All it needs to do now is maintain operational profits, pay their debts and start a consistent dividend policy. Sounds easy, right? It would be enough if they can re-structure their debt to a more manageable level or taking longer term loan and settling their short term debts.