Plastic and packaging sector’s capacity expansion likely to drive top-line growth
KUALA LUMPUR: The plastic and packaging sector’s capacity expansion will likely drive top-line growth progressively over the longer run, analysts observed.
“Capacity expansion across the sector is likely to drive top-line growth progressively over the longer run, assisted by continuous demand for niche plastic products (from FMCG and healthcare segments), and increasing usage of stretch film driven by Industry 4.0,” the research arm of Kenanga Investment Bank Bhd (Kenanga Research) said in a report.
However, despite its favourable view on the sector’s revenue growth, it remains cautious over the volatile raw material prices and the variability of the favourable product mix that have seen margin compressions in previous quarters.
“The higher resin cost due to demand and supply factors had affected FY18 earnings. Resin prices are currently range-bound between US$1,000 to US$1,300 per MT, while we are slightly more conservative, estimating resin cost of US$1,200 to US$1,400 per MT as resin prices have been volatile and appear to be on the uptrend again.
“Even if it was to stabilise at current levels, we believe that the positive effect may not be reflected immediately in the upcoming quarter due to existing inventory of resin held at higher cost, while most packagers are still grappling with weaker product margins and additional cost incurred during the fit-out stages from on-going capacity expansion,” it explained.
All in, Kenanga Research upgraded its call on the sector to ‘neutral’ from ‘underweight’.
“Nevertheless, upside will be capped by the lack of re-rating catalyst and margin-crimping high cost environment.
“We may look to increase earnings estimates should resin prices maintain a consistently lower trend, and upon more stable earnings deliveries in upcoming quarters,” it added.
Meanwhile, on the sector’s performance in the fourth quarter of 2018 (4Q18), Kenanga Research pointed out that plastic packagers’ results were mixed with Tomypak Holdings Bhd (Tomypak) coming in below expectation due to weaker top-line and higher-than-expected raw material costs, while Thong Guan Industries Bhd (Thong Guan) outperformed on improved product sales mix.
On the other hand, it said, Scientex Bhd (Scientex) is deemed broadly within expectation, due to lumpy progress billings in its property segment.
“This quarter’s results saw less surprises compared with 3Q18 when only one came within. Yearon-year, year to date, better sales volume led to improved top-line growth of four to nine per cent, except for Tomypak which sales softened due to lower sales volume and selling prices.
“At core net profit (CNP) level, eroding earnings before interest and tax (EBIT) margin saw Scientex and SCGM Bhd’s (SCGB) CNPs declined.
“Conversely, improved product sales mix in Thong Guan and better economies of scale for SLP Resources Bhd (SLP) saw their bottom-lines strengthening by 13 and 39 per cent, respectively,” it explained.
On a quarter-on-quarter (q-oq) basis, Kenanga Research noted that Thong Guan saw CNP growth of 140 per cent as they benefited from strengthening of US dollar in 4Q18 (up circa two per cent) that resulted in better selling prices.
“Positive tax recorded by sSLP and higher sales volume by SCGM saw CNP growth of 19 and 20 per cent, respectively.
“On the other hand, lower property revenue recognition by Scientex saw CNP declining by 27 per cent. Tomypak recorded CNL of RM3.7 million on the back of lower overseas revenue contribution and higher raw material costs,” it added.