KUALA LUMPUR: In the manufacturing sector, the prospects for can makers are weighed down by escalating raw material costs, higher anticipated labour costs and increased competition, said AmInvestment research.
"When comparing 9M2018 with 9M2017, the average prices of raw materials such as aluminum, tin plate and paper roll escalated by 12%, 5% and 8% YoY respectively."
The research house said this has eroded the margins of local can makers such as as Kian Joo Can Factory.
"Apart from higher raw material costs, the group also faces intensifying competition in its corrugated carton space and looming competition for its tin and aluminum can industries due to upcoming capacities from other regional players.
"Furthermore, KJC is expected to be impacted by higher labour costs in 2019 as the minimum wage in Malaysia was increased from RM1,000 to RM1,100 monthly while Vietnam’s minimum wage is expected to rise by 5.3% in 2019, especially as its manufacturing businesses and contract packing services are labour-intensive."
While downgrading its overweight stance on the manufacturing sector to neutral over the next 12 months, AmInvestment is positive on household product manufacturers such as VS Industry, ATA IMS and Luxchem Corp.
It said VS Industry and ATA would benefit from the rising trend in trading up in the floor-care market, particularly due to their ties with a key customer in the segment.
"The key customer has robust growth prospects and continuously innovates — planning a slate of new product launches over the next few years, which is anticipated to keep box-build orders growth sturdy.
"However, we believe that the positive earnings prospects for both companies have been factored in at their respective share prices."
In chemicals manufacturing, Luxchem and Samchem have very diverse end-applications while their diversified, large customer based should mitigate supplier switching concerns and excessive reliance on clent performance.
AmInvestment added that Luxchem would benefit from its exposure to the glove sector amid stricter hygiene standards globally.
Its top picks for the sector are Luxchem (Buy, FV 74 sen), ATA IMS (Hold, FV RM1.83) and VS Industry (Hold, FV RM1.31).
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