This article first appeared in The Edge Malaysia Weekly, on December 14 - 20, 2015.

WHAT will Tomypak Holdings Bhd look like 10 years from now? If everything goes according to plan, the total production capacity of the Johor-based plastic flexible packaging (PFP) producer should triple to 52,000 tonnes a year from 17,000 tonnes currently.

At the moment, Tomypak’s one and only plant in Tampoi, Johor Baru, is running at 80% utilisation. But plans are underway to build a new plant with an annual production capacity of 35,000 tonnes on a 10.5-acre parcel in Senai.

The new plant will be about twice the size of the 150,000 sq ft Tampoi facility, both in terms of production capacity and built-up area. It will also house an R&D facility to aid future expansion, as Tomypak strives to move higher up the value chain in terms of product quality and food safety standards.

Eddie Lim Hun Swee, managing director of Tomypak, believes aggressive expansion is necessary to meet the rising demand for PFP products from multinational corporations, including Unilever, Nestlé and Ajinomoto, as well as local food companies such as Apollo Food Industries Sdn Bhd, Mamee Double-Decker (M) Bhd and Hup Seng.

“The factory expansion will be closely tied to our 10-year plan — from 2016 to 2026. We are now embarking on a new journey, starting with a rights issue for our expansion plans,” he tells The Edge in an interview.

Lim, 63, took the helm at Tomypak in January. The Singaporean joined the board as a non-executive director in May 2014, and was appointed executive director last August.

According to Lim, Tomypak has a planned capital expenditure (capex) of RM120 million to RM140 million for its three-phase new factory project. Each phase will provide 12,000 tonnes of additional capacity per annum.

The capex, however, will be front-loaded at RM80 million for Phase 1. It expects to incur another RM20 million to RM30 million each for Phases 2 and 3.

This is where its warrant-sweetened one-for-two rights issue comes in. The cash call to raise up to RM54.73 million has the irrevocable undertaking by shareholders holding 50.69% equity interest based on the current share base. This means that RM27.75 million gross proceeds  will be raised if no one else subscribes to the steeply discounted rights shares, but these substantial shareholders will see their stake rise from 50.69% to 67.29%.

Tomypack intends to borrow and leverage existing resources to fund the remaining cost of its expansion. Cash and cash equivalents and short-term investments stood at RM7.44 million and RM13.61 million respectively as at Sept 30, 2015 but Lim says the company does not expect to make another cash call down the road.

“For Phases 2 and 3, the money will be spent on equipment as there will be no additional costs for factory building. We probably won’t have to make another cash call because, by then, we should be able to use the internal funds generated from Phase 1 [of the Senai plant],” he says.

The factory building is slated to be completed by October 2016, and is expected to commence operation in November. The first phase is expected to contribute minimally next year, followed by a full-year contribution in 2017. The second phase will begin in 2018 or 2019, and the third phase in 2021.

Based on its RM2.60 close last Thursday, the theoretical ex-rights share price could adjust to RM2.07 apiece — lower than the RM2.29 exercise price of the free detachable warrants that come with every rights share issued on a one-for-two basis.

To illustrate, a Tomypak shareholder with 1,000 shares will be entitled to subscribe for 500 rights shares and get 500 free warrants for RM500, as the rights shares have been fixed at RM1 apiece — a 56% discount to the theoretical ex-rights price of RM2.29 (see table). It is also a 61% and 65% discount to the last transacted price of RM2.61 on Nov 30 and the five-day weighted average market price of RM2.93 respectively, according to its announcement to Bursa Malaysia.

Lim says the steep discount will provide existing shareholders with an opportunity to increase their equity participation at under the market price. “It is our intention to motivate shareholders to subscribe for the rights shares. If the issue price is not attractive enough and only major shareholders are subscribing [for the shares], it’s not going to be a successful cash call.”

It is worth noting that Tomypak’s share price hit its record high at RM3 last month, before the cash call was announced.

New Orient Sdn Bhd, owned by Adrian Yong Kwet On and Tan Yeong Kuang, is currently the single largest shareholder of Tomypak with a 27.3% stake. The two bought a 25.4% stake from the Chow family — who founded the company — in October last year for RM1.30 per share.

To subscribe for the rights shares, New Orient is expected to fork out RM14.94 million, while Lim, being the second largest shareholder of Tomypak with 15.76% equity interest, is also required to spend up to RM8.43 million.  An extraordinary general meeting is to be convened by March or April.

In the meantime, Lim says, efforts are ongoing to lift Tomypak’s performance.

Tomypak concluded the financial year ended Dec 31, 2014 (FY2014) with a 42% drop in net profit to RM8.25 million. However, the group’s earnings and profit margins have improved significantly since Lim took over the reins. In the nine months ended Sept 30, 2015 (9MFY2015), Tomypak saw its earnings jump 277% to RM17.18 million from a year ago. Its net margin increased from 3% to 11%.

“We have seen higher employee morale, better productivity and less wastage at our plant. Everybody is participating as a team. This is not a business with a 30% to 40% margin. This is a manufacturing business with only a 10% margin, so every little thing we do counts,” says Lim.

An analyst with a local research house says he is positive on Tomypak’s rights issue as the proceeds will be used for capacity expansion, which is expected to boost the group’s future earnings. Not only that, investors who subscribe for the rights shares will also be rewarded with free warrants as a sweetener.

He says those looking to invest in PFP companies, Tomypak (fundamental: 1.70; valuation: 1.70) appears to be more attractive than its closest rival, Daibochi Plastic & Packaging Industry Bhd (fundamental: 1.70; valuation: 1.10).

“Both companies are in the same business with similar clients. If we annualise the earnings, Daibochi is trading at a price-earnings ratio of 22 times, and Tomypak is much lower, at 12 times,” he says.

The analyst adds that Tomypak is more appealing than Daibochi in terms of profit margin, dividend yield, net gearing level and shares trading liquidity, going by their performance in the past year.

Tomypak’s share price has more than doubled to settle at RM2.60 on Dec 10, giving the company a market capitalisation of RM289 million. Daibochi, which closed at RM5.10 on the same day, is valued at about RM583 million. Even if every shareholder subscribes for the rights issue, Tomypak’s market capitalisation will likely remain smaller than Daibochi’s — but a bigger operation would put it in a better position to generate higher earnings, provided it remains well-managed.

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