Analysts cautious on the future of domestic plastics industry

PETALING JAYA: Analysts are taking a cautious stance on the future of the domestic plastics and packaging industry on the back of persisting margin pressures.

Kenanga Research said in a recent report that based on the second-quarter results, three companies come in below the research house’s consensus estimates, while the other two were within expectations.

“The weaker-than-expected results stemmed from lower sales, higher raw material costs, lower-than-expected utilisation rates and a less-than-favourable product mix.

The margin pressures persisted due to the resin cost, which has decreased from the previous yearto-date (YTD) in 2017.

“We noted that resin prices have been decreasing YTD about 3%, close to our current estimates of US$1,200-US$1,400 per tonne and may signal a better quarter-on-quarter performance, moving forward,” it noted.

Year-to-date, the packagers’ share prices have declined by 30%-47%, outpacing the FBM Small Cap Index’s decline of 17% in tandem with the sector’s de-rating.

The research house’s previous report on April 6 listed the sector as “underweight” in the fourth quarter of 2017, and the notion remains for the second quarter of 2018.

“We reckon the weak share price performance of plastic packagers was mainly due to consistently weak earnings, save for SLP Resources Bhd.

The margin compression for the market still remains an issue.

“Despite expectations of higher revenue from capacity expansion, margin compression remains a concern among the packagers,” the report stated.

“Volatile raw material prices and the variability of a lower margin product mix, coupled with higher cost incurred during the fit-out stages from ongoing capacity expansion, have caused margins to decline in recent quarters,” it added.

An earlier report by Public Investment Bank on SCGM Bhd said that the company showed no signs of improving anytime soon.

“We came away from SCGM’s analyst briefing last Friday seeing little signs of the company being able to recover from poor margins anytime soon, as it is currently embroiled in intense price competition for lunch boxes, as well as being hit by rising resin costs which make up 60%-65% of operating costs,” it said.

SCGM countered stiff competition with the launch of its cheaper lunch box version, called ‘Ecoplus’.

However, it’s not all doom and gloom for the plastics and packaging sector, as resin costs have decreased and stayed range-bound between US$1,100 and US$1,300 per tonne.

The decrease in the resin cost would help increase the profit margin and could potentially be a re-rating catalyst for the lackluster market by increasing the earnings of plastic packaging companies under Kenanga’s coverage by around 6% to 8%.

According to an international research house, the Malaysian plastics market is “expected to show healthy growth in the near future, due to the rising demand from the food and beverage (F&B) and pharmaceutical industries. The growing demand for electronic products is also expected to propel the demand in the Malaysian market”.

The Malaysian plastics market’s revenue was estimated at US$3.3bil (around RM13.72bil) in 2017 and is likely to expand at an estimated compounded annual growth rate of 5.27% during the forecast period of 2018-2023.

The forecast has a seed of reality, as the F&B segment remained the largest contributor to SCGM’s total revenue, as it made up 77.8% of group sales, followed by extrusion at 14.6% and electronics, medical and others at 7.6%.

There is another silver lining for the industry besides the lowering resin costs.

Kenanga stated that the capital expenditure (capex) into more niche products is likely to drive a higher top-line. “Continuous demand for niche plastic products (ie, fast-moving consumer goods or healthcare segment) would assist growth progressively over the long run,” it noted.

Despite the lower margins and weaker earnings of the stocks under Kenanga’s coverage, it is positive that future capex plans would help the various companies.

“Going forward, we are optimistic on top-line growth as capacity expansion plans come to fruition, but we caution that the high-cost environment is taking a toll on margins and earnings,” the brokerage said.

In the case of Thong Guan Bhd, the commission of an additional stretch film production line in the fourth quarter might boost capacity, while Tomypak Holdings Bhd is expected to increase capacity by 44% in financial year 2020 (FY20) to FY21, SLP Resources by 58% and SCGM by 65% with the commissioning of its new Kulai factory by the end of this year.

“All in all, we are weary of the rising cost environment of plastic packagers under our coverage,” the report said.