Kenanga Research saw that plastic packagers’ share prices declined by 17 to 53 per cent year to date, outpacing the FBM Small Cap Index declines.
KUCHING: It has been a challenging period for plastic players as results in the first quarter of the calendar year 2018 (1Q18) were mostly below expectations of Kenanga Investment Bank Bhd (Kenanga Research).
Plastic packagers’ 1Q18 results were mostly below expectations and was comparatively weaker than 4Q17 results season.
“The weaker-than-expected results were due to various reasons, including higher raw material cost, higher start-up cost, lower-than-expected utilisation rates, and less-than-favourable product mix,” observed Kenanga Research in a sector outlook. During the results season, we lowered earnings for all plastic packagers on weaker margins, save for SLP Resources Bhd (SLP Resources).
“We also downgraded our applied price earnings ratios in light of weaker margins and switched our valuation for Tomypak Holdings Bhd (Tomypak) as well as SCGM Bhd to price to book value ratio due to earnings volatility.
“All in, we lowered all our target prices by eight to 34 per cents, save for SLP. We also downgraded our call for Thong Guan Industries Bhd on weak earnings, but upgraded SLP in light of the steepest year to date sell-down versus peers, despite results meeting expectations.”
Kenanga Research saw that plastic packagers’ share prices declined by 17 to 53 per cent year to date, outpacing the FBM Small Cap Index declines.
“We believe the strong sell-down of plastic packagers was due to sector decline, which was in tandem with the FBMSC de-rating earlier this year, as well as the added impact of weak earnings from most plastic packagers, save for SLP.”
The firm further expect growth to be driven by demand for niche plastic products, and stretch film through Industry 4.0.
“Most plastic packagers under our coverage are continuously targeting new markets such as China, United States, Canada and Africa, and are working on more niche products to improve margins,” it said.
“We expect capacity expansion across the sector to drive top-line growth in the longer-run, assisted by continuous demand for niche plastic products.
“Near-term growth, if any, will be boosted by margin expansions, 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.”
Notably, Kenanga Research saw that strengthening raw material prices have caused margin compressions in recent quarters.
Specifically, CY17 saw higher resin cost due to demand and supply factors while the trend appears to have affected recent 1Q18 results as well.
“Resin prices are currently range bound between US$1,200 to US$1,400 per kilogramme, but we believe there is an inclination for it to trend downwards in CY18 on increased supply.
“Meanwhile, plastic packagers may also see margin compressions from higher cost incurred during fit-out stages from ongoing capacity expansion. We maintain our resin cost assumptions as we opt to be conservative for now.
“However, we may look to lower resin cost assumptions going forward, pending further clarity of the effects of additional resin supply from China, India, and US shale-based resin on prices.
“Down-trending resin prices 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.”