KUALA LUMPUR: The longer-term prospects for the plastics and packaging industry remain positive fuelled by continued capacity expansion and potential benefits from the TPPA.
Kenanga Research noted on Wednesday that packagers SLP and SCIENTX are still planning to grow capacity beyond current levels, with SLP planning a new manufacturing facility to fully materialise by 2018, while SCIENTX intends to double the capacity at its newly acquired Ipoh plants.
It expects the continued expansions to ensure long-term earnings growth beyond 2018. The research house said it has already priced in these plans for companies, which have finalised details such as timeline and production capacity.
Meanwhile, a PricewaterhouseCoopers (PwC) study highlighted that the US currently has anti-dumping duties of 104% on Plastic Retail Carrier Bags, which comprise about one-third of Malaysia’s production of downstream plastics.
The reduction/removal of the duty will benefit plastic players, including SLP and BP Plastics. PwC also pointed out that resin costs could also decline, because 37% of raw material comes from TPPA member countries (i.e. Singapore, Japan & US).
“Thus, we are optimistic that the TPPA will have a long-term positive impact on the Plastics and Packaging sector,” it said.
Kenanga has accounted for lower resin prices for all plastic packagers under its coverage as it assumes US$1,150-1,200/MT in its estimates. Resin cost may decrease further if supply continues to increase.
Resin prices remain strongly correlated with crude oil prices over the long run with an average correlation of 90%. However, despite the sharp crude oil price correction since mid-2014 by 75%, resin prices corrected only by 35%, likely due to cost of resins production providing a floor price.
“We expect the trend of current low resin prices to continue, with resin price movement being more stable than crude oil prices, likely due to the high supply situation as noted above,” it said.
The sector’s 4Q15 results were above expectations, mainly due to better-than-expected net margins from stronger contribution from premium products, increased export sales as the US$ to ringgit was the strongest in 4Q15, as well as higher property sales recognition for SCIENTX as property development provides higher margins.
Kenanga believes sector valuations have peaked as all plastic manufacturers, SLP (18.6x FY16 PER), TGUAN (11.0x FY16 PER) and SCIENTX (9.7x FY17 PER) are currently trading at +2.0SD over their 5-year average.
This is because investors are more forward looking and as a result, Kenanga pegged its valuations based on CY17 in the recent results season while leaving its applied PE’s unchanged.
“Even after pegging our valuations to 2-year forward to FY17, we believe the sector is already fairly valued as current prices imply close to +2SD on 2-year forward earnings,” it said.
It maintains its Neutral call on the Plastics and Packaging sector.
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