PETALING JAYA: A slight pick-up in demand for plastic packaging products in the second half of 2023 (2H23) is expected, as buyers rush to stock up ahead of price hikes driven by higher resin prices.
Resin prices have inched up by about 5% since July this year.
However, the utilisation rate of plastic packaging products is expected to stay range bound and lacklustre at between 50% and 65% across the board in 2H23, Kenanga Research said.
The research house said higher electricity costs appear inevitable from August but remain manageable to sector players.
Its top pick for the sector is Thong Guan Industries Bhd
, for which it has an “outperform’’ call on the stock with a target price (TP) of RM3.05 a share.
Kenanga Research likes the company for its earnings stability, underpinned by a more diversified product portfolio.
Thong Guan’s earnings growth prospects are underpinned by expansion in production capacity for premium products such as nano stretch films and courier bags and a deeper penetration into the European and US markets.
The company undertakes product innovation via research and development and collaboration with the likes of ExxonMobil to produce more environmentally friendly products.
Kenanga Research, however, has a “neutral’’ outlook on the sector.
Earnings delivery by the sector in the recently-concluded second quarter 2023 (2Q23) results season was less disappointing versus the preceding quarter.
Generally, the companies’ top lines contracted due to weaker sales volume amid global economic slowdown and lower average selling prices in line with falling resin prices, which is the main input costs, it noted.
The industry also continued to feel the impact of rising operating costs in 2Q23, notably from higher labour and utility costs.
However, it managed to maintain margins quarter-on-quarter, thanks to better product mix as well as tighter cost control.
There was a bright spot in higher-margin products, particularly the thinner types as they are more environmentally friendly.
Kenanga Research expected BP Plastics Holdings Bhd, Scientex Bhd, SLP Resources Bhd and Thong Guan to face higher electricity costs in 2H23, as they opt out from the Green Energy Electricity (GET) programme.
This is due to the higher GET rate of 21.8 sen per kWh (from 3.7 sen per kWh) compared to the conventional imbalance cost pass-through surcharge of 17 sen per kWh.
Nevertheless, the impact of higher electricity costs should be manageable as electricity typically makes up only 4% to 6% of total production costs.
