GW Plastics to benefit from capacity expansion
by Venu Puthankattil, firstname.lastname@example.org. Posted on August 18, 2012, Saturday
KUCHING: GW Plastics Holdings Bhd (GW Plastics) is to potentially benefit from a stabilising plastic resin price due to the gradual increase in the supply of new petrochemical capacities and its timely capacity expansion, which will be able to capture the rising demand for both its blown and cast films.
Teo Joo Tse, an analyst from research arm of Kenanga Investment Bank Bhd (Kenanga Research) expressed this in a research note, citing the group’s results for the first half of financial year 2012 (1HFY12), where profit before tax (PBT) jumped by 27.4 per cent year-on-year (y-o-y) on the back of greater volume (up 14.7 per cent y-o-y).
The earnings of RM11.4 million for the first six months of the year was in line with the research house’s estimates, making up 44.5 per cent of its forecast of RM25.7 million.
“The robust 11.2 per cent y-o-y sales growth in 1H12 was mainly driven by higher volumes from both blown (up 15 per cent y-o-y) and cast films (up 14.4 per cent y-o-y), which has offset the lower average selling price (ASP), down three per cent y-o-y.
“Thus, a higher PBT margin was achieved on the back of better economies of scales,” Teo said, adding that she had revised Kenanga Research’s FY12 and FY13 earnings forecast up 1.5 per cent and down 16.7 per cent respectively to RM26 million and RM29.4 million due to in-house crude oil estimate adjustments.
A significant change was seen in FY13 earnings mainly due to a 10.4 per cent cut in the in-house crude oil estimates to US$95 per barrel from the previous assumption of US$106 per barrel.
“The company’s strategy is to continue its capacity expansion to enjoy a boom time ahead in profits through the volume game and by riding on lower raw material prices with the oncoming supply of new petrochemical capacities (which is expected to come on-stream next year).
“With the potential overcapacities, we foresee its raw material cost to at least stabilise in the coming years. This implies that the management would find it easier to maintain or improve its margin.
“A new cast film machine is actually in the pipeline and is expected to be commissioned in 3Q13 to increase its existing cast film capacities by 30 per cent to about 34,000 tonnes,” she added.
Despite the lower FY13 earnings forecast, she raised the payout ratio assumption from the minimum policy of 40 per cent to 50 per cent as “we reckon that the management now has the intention to pay a higher dividend y-o-y in absolute term.
“Thus, we expect the company to distribute a net dividend per share of 5.5 sen and 6.2 sen for FY12-FY13, which translate into attractive dividend yields of 6.5 and 7.4 per cent, respectively.”
In terms of risks, she told The Borneo Post that the only major concern would be dramatic increases in the price of crude oil (which was correlated to petrochemical prices) and even then, the increase of production costs would not be immediate.
On the bright side, she pointed out that GW Plastics catered mainly to the fast moving consumer goods (FMCG) sector with sales in Malaysia making up the bulk of the company’s revenue at 40 per cent.
Japan, Singapore, South Korea Australia and New Zealand made up most of the international export destinations. As such, exposure to weakened European and US economies as well as downside risks from weaker demand were minimal, she said.
The analyst rolled over Kenanga Research’s valuation base year to FY13 and revised the target price to 92 sen (from 86 sen previously) based on a two-year average price earnings ratio (PER) of 8.2 times, from eight PER previously.
“We believe 8.2 times PER is fair as the weighted industry forward PER stands at eight times. Coupled with the dividend yield of 7.4 per cent, the stock offers a total return of 16.3 per cent,” she concluded.