Plastics and packaging sector bullish on growth
KUALA LUMPUR: Growth in the plastics and packaging sector is expected by analysts to be driven by resilient demand for niche plastic products and stretch film.
According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), with plastic packagers continuously tapping into new markets such as China, US, Canada and Africa, and working on more niche products such as fast-moving consumer goods (FMCG) or healthcare segment to improve margins, most plastic packagers have embarked on bullish capacity expansion plans, which should accrete over the longer run.
“We expect growth to be driven by resilient demand for niche plastic products and stretch film through Industry 4.0,” Kenanga Research said.
Kenanga Research noted that Tomypak Holdings Bhd (Tomypak) is increasing capacity by 89 per cent by financial year 2020-2021 (FY20-21), SLP Resources Bhd (SLP) by 58 per cent in FY19, and SCGM Bhd (SCGM) by 65 per cent by FY20, while Thong Guan Industries Bhd (Thong Guan) is targeting circa 10 to 15 per cent expansion.
It further noted that in the near
We expect growth to be driven by resilient demand for niche plastic products and stretch film through Industry 4.0. Kenanga Research
term; earnings growth, if any, will come from margin expansions.
“This is premised on better cost efficiency and product innovations that could bump up margins as plastic manufacturers look to sell more niche and higher margin products.”
In tandem with weaker US Dollar-ringgit exchange rates of late, Kenanga Research lowered its current year 2018 (CY18) US dollar-ringgit forex to RM3.90 (from RM4.10) in line with the research arm’s in-house estimates.
“As most plastic packagers are net beneficiaries of a stronger US dollar, our forex assumptions prompted us to lower our earnings estimates by 4-3 per cent on average in FY18-19 for SLP, Tomypak and Thong Guan.”
The research arm had previously lowered its US dollarringgit forex for Scientex Bhd and SCGM in the recent results season.
Kenanga Research highlighted that CY17 saw higher resin cost due to demand and supply factors, with prices increasing by up to 20-30 per cent year on year for plastic packagers under our coverage as most of them suffered resin cost spike in the first half of 2017 (1H17).
As a result, most plastic packagers under the research arm’s coverage saw weaker earnings from margin compressions this year.
“However, there is a possibility that resin prices could trend downwards going forward on ample supply of resin due to excess capacity from China and India, and US shale-based resin in CY18, which could be a rerating catalyst for the sector.
Resin prices for plastic packagers under Kenanga Research’s coverage are currently range-bound between US$1,1001,300 per kilogram (kg), in line with the research arm’s CY18 estimates.
However, the research arm believed it may trend downwards slightly in 2H18 on increased supply.
“We opt to be conservative and maintain our resin cost assumptions for now,” it said.
“However, going forward, we may look to lower resin cost assumptions pending further clarity of the effects of additional resin supply on prices.”
“We believe this could be a positive re-rating catalyst for the sector; assuming a two per cent decline in resin prices, this could increase plastic packagers’ earnings under our coverage by six to eight per cent.”
Overall, Kenanga Research downgraded the sector to ‘underweight’, from ‘neutral’ previously, noting that the research arm was comfortable with its sector call as it remained cautious on the higher cost environment.