Lower Q4 margins seen for plastics, packaging players

TheStar Fri, Jan 08, 2021 09:20am - 1 month ago


Plastic packagers’ results came in mixed with three coming within expectations and they are Scientex Bhd (pic), SCGM Bhd and Tomypak Holdings Bhd.

PETALING JAYA: Plastics and packaging manufacturers may report slightly lower margins in the fourth quarter of 2020 (Q4) due to higher resin costs, says Kenanga Research.

“Judging from previous swings in resin prices, plastic packagers’ margins tend to reflect resin price movements one or two quarters after the fact, ” it said.

“Therefore, the Q4 results may begin to reflect margin compressions from the higher resin costs, which we’ve already accounted for in our 2020 estimates, as we assumed average resin costs of US$950-US$1,100 per tonne for 2020, ” it added.

Kenanga, which has maintained its neutral call on the sector, said that even though resin prices have been rising since May 2020, plastic packagers still enjoyed higher operating margins quarter-on-quarter (q-o-q) in Q2 and Q3.This is because they did not immediately feel the impact of rising resin costs, Kenanga said.

“How quickly and severely rising costs will impact their profits depend on each company’s procurement policy and the contracts with their suppliers. Note that while resin prices have been steadily rising since May towards our assumed prices of US$950-US$1,100 per tonne, the recent spike in December appears to be short-lived, and therefore, may not materially impact earnings, ” it said.

Commenting on plastic and packaging manufacturing companies, Kenanga said Q3 revealed these companies having mixed results.

“Plastic packagers’ results came in mixed with three coming within expectations and they are Scientex Bhd, SCGM Bhd and Tomypak Holdings Bhd. Thong Guan Industries Bhd (pic below) was above expectations while SLP Resources Bhd came in below, ” Kenanga said.

It noted also that the revenue of plastic packagers has been recovering well with profit margins at multi-year highs, thanks to lower resin costs and better product mixes.

It noted that Scientex, Thong Guan and SCGM had seen their Q3 margins moving to multi-year highs from 8%-10% to 11%-17% for its earnings before interest and taxes margins.

Margins for these companies had moved up due to multi-year-low resin prices and higher-margin products.

Kenanga, meanwhile, said SLP was not able to capitalise on the low raw material prices as their margins remained relatively stagnant from previous years, while Tomypak returned to the black in Q2 but recovery had been slow.

The research house has maintained its neutral call on the sector but has selected picks that it thinks have some upside potential.

It has upgraded SCGM to an outperform with an unchanged target price of RM3.85 based on a 19 times price-to-earnings ratio (PER), which is a +0.5 standard deviation (SD) to the five-year historical average of 2021’s forecast earnings per share (EPS) of 20.3 sen.

Kenanga has also upgraded Thong Guan to an outperform with an unchanged target price of RM3.25 based on a 13.8 times PER which is a +0.5 SD to the five-year historical average of FY21’s forecast fully diluted EPS of 22.3 sen.






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