IN the Covid-19 pandemic, there has been a proliferation of a product many have been trying hard to reduce: plastic packaging.

Fearing the spread of the coronavirus, vendors and consumers turned once again to plastic packaging.

It is perhaps not surprising then that analysts see better prospects ahead for plastic packaging companies. Demand is projected to rise as economic activities resume now that nearly all restrictions have been lifted from most sectors of the economy.

In addition, lower oil prices are expected to result in lower raw material costs.

Rakuten Trade Sdn Bhd head of research Kenny Yee highlights an increase in demand for packaging products from the food and beverage industry as many consumers are now more inclined to order in rather than dining out to avoid crowds.

The rise in e-commerce is another factor boosting demand for plastic packaging.

Whether packaging companies are set to benefit in the coming months remains to be seen, but Yee reckons valuations for most players are at a “reasonable level” — supported in part by the anticipated rise in demand for their products and lower crude oil prices.

“There should be upside for the share price, but to what level, it is hard to say,” he says.

A head of research who did not want to be named is also of the opinion that the above-mentioned factors will benefit the players.

“Also, with the USD/MYR trend still hovering above RM4/USD, that is still decent for earnings, while lower crude oil prices will benefit their cost structure as plastic resin is the raw material for plastic companies,” says the research head.

Oil prices have plunged to a record low in recent months with Brent crude falling below US$20 per barrel in April for the first time in 18 years, tracking the price collapse in West Texas Intermediate (WTI), which slipped into negative territory for the first time in history.

Prices have recovered some ground, and at time of publication, Brent crude oil was trading at US$41.23 and WTI at US$39.16. Year to date (YTD), Brent has fallen 38% from US$66, while WTI is 36% lower from US$61.06, according to Bloomberg.

On the currency front, the ringgit is hovering at 4.2850 against the greenback. YTD, the local unit has weakened 5% from 4.0910.

Already, SCGM Bhd is up 30% YTD, closing at RM1.99 last Tuesday, while Thong Guan Industries Bhd charted gains of 14% to RM3.81.

In contrast, SLP Resources Bhd has seen a 26% drop in its share price, and closed at 83 sen, while Tomypak Holdings Bhd is down 7% to 46.5 sen. Scientex Bhd has shed 6% to RM8.90.

In terms of price-earnings (PE) ratio, SCGM tops the list, trading at 22.11 times PE. The others range between nine and 13 times PE.

The head of research says the share price gain of SCGM, which specialises in thermoform food packaging products, was driven by its venture into personal protective equipment, specifically the manufacture of protective face shields.

As the market is positive about the company’s move, he says investors are likely to have pegged SCGM at a higher PE ratio.

As for Thong Guan, he says the share price is relatively strong because the company exports most of its products, including courier bags, which are in demand because of the boom in e-commerce.

He observes that SLP Resources and Tomypak could have been affected by softer demand and higher operating costs during the Movement Control Order (MCO).

He attributes Scientex’s decline, the smallest YTD fall among these stocks, to its stable operations even during the MCO.

Kenanga Research’s Marie Vaz has retained a “neutral” call on the sector but has listed SCGM as a “market perform” with a target price of RM1.40 as she sees its face shield operations compensating for the shortfall in earnings during the Covid-19 period.

But Vaz believes the sector will be quick to bounce back to pre-crisis valuations when the Covid-19 pandemic is over.