KUALA LUMPUR: Kenanga Investment Research has upgraded the plastics and packaging sector to Neutral from Underweight after raising its recommendation for Tomypak and SLP.
However, it said on Friday upside will be capped by the lack of re-rating catalyst and margin-crimping high-cost environment.
Kenanga Research said the 4QCY18 results were mixed with Teck Guan coming in above on improved product sales mix, but Tomypak underperformed on weaker top-line and higher raw material costs.
Year-to-date, share prices were mostly reflective of recent results, with its universe’s top gainer being Teck Guan (+15.5% year-to-date) and top decliner being Tomypak (-13.2% YTD).
“Moving forward, we are less concerned of top-line growth with capacity expansion plans coming to fruition, but remain cautious on the volatile raw material prices, the variability of favourable product mix and higher operating expenses that continue to compress margins.
“Average resin prices are currently range-bound between US$1,000 to US$1,300 a tonne, while we are slightly more conservative with our resin cost estimate of US$1,200 to US$1,400 a tonne given resin price volatility and its recent upward trend,” it said.
Kenanga Research upgraded Tomypak to market perform from underperform as the share price had retraced to its target price of 49.5.
It raised SLP to outperform from market perform as its share price has declined 18% since its last report which it thinks is unwarranted as SLP had consistently met/exceeded expectations and maintained the strongest margins among our coverage stocks.
“Our preference is SLP as it is currently trading at an attractive valuation while its earnings and margins record are superior to peers,” it said.