Margin compression remains a major concern for Kenanga Investment Bank Bhd’s resarch firm (Kenanga Research) in its review of Malaysia’s plastics and packaging industry.
The group in a note yesterday remained cautious over the volatile raw material prices, the variability of favourable product mix and higher operating expenses that has caused margin compressions in recent quarters, while there is yet to be a strong signal of recovery.
“Margin-wise, upstream consumer plastic packager SLP Resources Bhd (SLP) was the strongest with 15 per cent of earnings before interest and tax (EBIT) margins, while SCGM Bhd (SCGM) at six per cent. Downstream consumer packager, Tomypak Bhd (Tomypak) saw its margin at only one per cent.
“Meanwhile, industrial packager, Scientex Bhd’s (Scientex) plastic manufacturing EBIT margin was flattish at five per cent, but Thong Guan Industries Bhd (Thong Guan) experienced margin compression to six per cent EBIT margin.
“Resin prices have increased circa eight per cent year to date, averaging at US$1,150 to US$1,300 per metric tonne (MT) per annum, which is close to our resin cost estimate of US$1,200 to US$1,400 per MT.
“That said, we noticed resin prices had declined by about six per cent quarter on quarter (q-o-q), but we believe this may not reflect immediately in improved earnings 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.”
This comes as plastic industry players saw mixed results for its third quarter for the calendar year 2018 (3QCY18).
Plastic packagers’ 3Q18 results were mixed with SCGM coming in below due to margin pressure, and Thong Guan coming in within.
The outperformers were Scientex, which outperformed on better property margin, SLP on better operating margin from improved economies of scale, while Tomypak recorded unexpected positive tax, Kenanga Research said.
Share prices mostly declined in light of weak results, ranging from 32 per cent to 58 year to date, similar to the FBM Small Cap Index’s decline of 32 per cent.
“We believe the weakness were mainly due to declining earnings, particularly during the first half results season (except for SLP), while we believe the sector also declined in tandem with the FBMSC de-rating. Scientex is the only outlier under our coverage, which saw share price improvement by nine per cent to date.
Meanwhile, the research firm believed capacity expansion across the sector will deliver higher top-line growth progressively over the longer run, assisted by continuous demand for niche plastic products (i.e. from FMCG and healthcare segments), and increased use of stretch film driven by Industry 4.0.
“We expect TOMYPAK to increase capacity by 44% in FY20-21, SLP by 58 per cent in FY20, while Thong Guan by circa five per cent per annum in FY18-19E and have recently commissioned a stretch film production line in 4Q18, and SCGM by 65 per cent in FY20.
“Scientex will continue to focus on ramping up utilisation, targeting 70 per cent over the next few years.”
Source : theborneopost.com