WE THINK the 5.9% pt YoY drop in NTPM's gross margin to 43.6% in FY4/23 was due to an uptick in raw material costs with pulp prices contributing c.49% of cost of sales.

Pulp prices rose c.62% between FY21 and FY23 which led to a c.10% pt decline in margins over the same period. As pulp prices have corrected c.32% YTD, we expect pulp prices to stabilise, resulting in a margin recovery in FY24F.

We estimate that NTPM will return to positive earnings in FY24F, delivering an FY24-FY26F EPS compound annual growth rate (CAGR) of 63%, fuelled by a 9% CAGR in its tissue paper product volume sales and a normalisation in gross margins (from 43.6% in FY23 to 51.7% in FY26F) as raw material costs stabilise. Based on our observations, NTPM's tissue paper products, namely PREMIER and Royal Gold, have a keen following among its more affluent clientele, with these two brands helping to ensure NTPM's 45%-50% market share in the consumer tissue market industry over the last 20 years despite the entry of two foreign players and the aggressive pricing strategy of its main competitor, Kimberly Clark. With its strong brand name and customer loyalty, as well as consistent expansion into the exports market and volume, NTPM has managed to maintain a 12-year tissue paper product sales CAGR of 5% over FY12-FY23. While utilisation of its tissue paper products capacity hit a low of c.50% in FY23, management said utilisation has since risen to 55% as of August, driven by growth in demand for its tissue paper products in both local and export markets.

We upgrade NTPM to 'Add' from 'Hold' with a higher target price of RM0.75 based on a Gordon Growth Model (GGM) to better capture its medium-term profitability and growth trajectory.

Our GGM assumes a recurring 11.0% ROE (based on FY26F), an 9% COE and a healthy 4% longterm growth. At RM0.75, NTPM's implied FY4/26F P/E multiple of 13x is similar to its pre-CY18 mean, when pulp price volatility spiked.

Downside risks include increase in raw material prices, freight costs or a weaker ringgit, increase in market competition intensity and lower growth in capacity utilisation rates.