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<\/figure>\n\n\n\nTo recap, SCGM Bhd chose to exit the plastic packaging business three months ago to unlock its value. Valued at a price-earnings multiple of 16 times, the RM544.38 million disposal to Japan-based Mitsui & Co Ltd and FP Corp will result in a distribution of RM2.21 per share to its shareholders. Analysts said it was a good deal as the company had been hit by high costs and unfavourable product sales mix.<\/p>\n\n\n\n
Thong Guan remains Tan\u2019s top pick in the plastic packaging sector for its attractive valuation and better product diversification and portfolio. \u201cWhile demand from Europe is slowing down, Thong Guan\u2019s business operation has been supported by the US market. It is also benefiting from forex gains due to the strong US dollar,\u201d she says.<\/p>\n\n\n\n
Tan understands that Thong Guan has already obtained the green light from the government to bring in foreign workers, with the initial batches to arrive as early as the second half of the year.<\/p>\n\n\n\n
\u201cThe new workers should help boost productivity, especially in the labour-intensive garbage and courier bag segments. With the completion of its new factory, we expect an increase in production output to cater for the robust demand for its premium packaging film, premium stretch film and courier bags which are seeing demand recovery.\u201d<\/p>\n\n\n\n
Thong Guan\u2019s latest 2Q net profit for the period ended June 30 grew 15.28% to RM29.47 million from RM25.56 million in the previous corresponding quarter. On a quarterly basis, its net earnings were up 19.8%.<\/p>\n\n\n\n
Tan has raised Thong Guan\u2019s target price to RM3.99 from RM3.90 as its valuation base is rolled forward to FY2023.<\/p>\n\n\n\n
\u201cWe expect ASPs to ease very gradually despite the cost of input resin having softened 13% to 15% year to date, resulting in margin expansion. The stickiness of ASPs against downside stems from the robust demand, especially for its premium products (stretch film, courier bags and packaging film) as economies reopen around the world,\u201d she said in a research note last Friday.<\/p>\n\n\n\n
Meanwhile, Tan points out that supplying products to large multinational companies may make it hard for Scientex Packaging (Ayer Keroh) and Tomypak to increase product prices. \u201cTypically, the contracts are locked in for three to six months. However, they may see better margins on the back of lower resin prices.\u201d<\/p>\n\n\n\n
Although BP Plastics Holding Bhd posted a 17.45% drop year on year to RM12.19 million for 2Q ended June 30, due to elevated freight charges and higher production costs, it managed to grow 61.7% quarter on quarter on better sales.<\/p>\n\n\n\n
Leong favours BP Plastics for its ongoing capacity expansion, with the 10th cast stretch film machine coming on stream; strong balance sheet with a net cash position of RM39.6 million at end-June; and improving margins as a result of a better product mix.<\/p>\n","protected":false},"excerpt":{"rendered":"
LOW raw material prices coupled with high average selling prices (ASPs) is the ideal scenario for any manufacturer. Plastic packaging companies are currently enjoying such market conditions. Indeed, some chalked up a decent profit in the second quarter ended June 30. For one, SLP Resources Bhd almost doubled its net profit to RM8.86 million for the April to June quarter from RM4.51 million for the January to March quarter, primarily due to a land disposal gain of RM5.1 million. The net earnings of BP Plastics Holding Bhd and Thong Guan Industries Bhd surged 61.7% and 19.8% to RM12.19 million and RM29.47 million respectively during the same period. Nonetheless, the window of opportunity to make a bumper profit is closing soon, with ASPs expected to be adjusted downward in the fourth quarter to catch up with the lower raw material prices, according to investment analysts. Furthermore, analysts see the risk of weaker demand growth up ahead. Compared with their peaks in March, the prices of the three most commonly used variants \u2014 low-density polyethylene (LDPE), high-density polyethylene (HDPE) and linear low-density polyethylene (LLDPE) \u2014 have retreated 31.1%, 28.5% and 29% to US$1,220, US$1,030 and US$1,030 per tonne respectively. \u201cWhat\u2019s interesting in 3Q is that ASPs are at high levels, but raw material prices are dropping. Plastic packaging firms don\u2019t keep much stock \u2014 mostly less than two months \u2014 so they can enjoy margin expansion from lower raw material prices,\u201d Kenanga Research analyst Tan Jia Hui tells The Edge. \u201cAlthough resin prices have seen a sharp drop, from what we heard from the management, they are still maintaining the ASPs. However, they are likely to soften in 4Q, given the need to make adjustments.\u201d She foresees resin prices falling further, partly attributed to excess capacity. \u201cIf prices fall below US$1,000, it would mark a return to pre-Covid-19 levels,\u201d she notes, adding that some players could have held back orders to bet on lower resin prices in the months ahead. Demand growth will be a key concern moving into 4Q, she says, particularly due to China\u2019s lockdowns that have led to lower manufacturing activities and resulted in less consumption of plastic packaging materials. Tan highlights that on the bright side, the drop in freight cost will help plastic packaging firms maintain a gross profit margin of at least 15%. Malacca Securities analyst Kenneth Leong shares this view, saying that most of the plastic packaging players are adopting the cost pass-through mechanism, although there may be a lag in the adjustment of ASPs. Having said that, he cautions that rising labour costs, electricity tariff hikes and higher transport costs are eating into their margins, despite lower resin prices helping to cushion the margin squeeze. Leong believes that the downward trajectory in resin prices will persist, barring any major unforeseen supply disruption. Any incremental increase in new supply will be absorbed by the improving demand, he says. \u201cDemand has seen an improvement, but it is still below pre-pandemic levels, while ASPs are on a gradual rise.\u201d Consensus target prices compiled by Bloomberg show that Thong Guan has an upside of 62.3% based on the target price of RM4.22 \u2014 the highest among its peers. The share prices of plastic packaging counters have generally contracted year to date, with Scientex Bhd being the most at -26.9%, followed by Scientex Packaging (Ayer Keroh) Bhd (-12.9%), BP Plastics (-9.1%) and Thong Guan (-7.1%). Earnings-wise, only Thong Guan and SLP Resources are forecast to register growth for FY2022 ending Dec 31, to RM113.5 million and RM18.43 million, from RM92.97 million and RM17.73 million in FY2021, respectively. Interestingly, most plastic packaging firms are expected to post higher earnings in FY2023, except Tomypak, which is anticipated to remain in the red. To recap, SCGM Bhd chose to exit the plastic packaging business three months ago to unlock its value. Valued at a price-earnings multiple of 16 times, the RM544.38 million disposal to Japan-based Mitsui & Co Ltd and FP Corp will result in a distribution of RM2.21 per share to its shareholders. Analysts said it was a good deal as the company had been hit by high costs and unfavourable product sales mix. Thong Guan remains Tan\u2019s top pick in the plastic packaging sector for its attractive valuation and better product diversification and portfolio. \u201cWhile demand from Europe is slowing down, Thong Guan\u2019s business operation has been supported by the US market. It is also benefiting from forex gains due to the strong US dollar,\u201d she says. Tan understands that Thong Guan has already obtained the green light from the government to bring in foreign workers, with the initial batches to arrive as early as the second half of the year. \u201cThe new workers should help boost productivity, especially in the labour-intensive garbage and courier bag segments. With the completion of its new factory, we expect an increase in production output to cater for the robust demand for its premium packaging film, premium stretch film and courier bags which are seeing demand recovery.\u201d Thong Guan\u2019s latest 2Q net profit for the period ended June 30 grew 15.28% to RM29.47 million from RM25.56 million in the previous corresponding quarter. On a quarterly basis, its net earnings were up 19.8%. Tan has raised Thong Guan\u2019s target price to RM3.99 from RM3.90 as its valuation base is rolled forward to FY2023. \u201cWe expect ASPs to ease very gradually despite the cost of input resin having softened 13% to 15% year to date, resulting in margin expansion. The stickiness of ASPs against downside stems from the robust demand, especially for its premium products (stretch film, courier bags and packaging film) as economies reopen around the world,\u201d she said in a research note last Friday. Meanwhile, Tan points out that supplying products to large multinational companies may make it hard for Scientex Packaging (Ayer Keroh) and Tomypak to increase product prices. \u201cTypically, the contracts are locked in for three to six months. However, they may see better margins on the back of lower resin […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[62,64],"tags":[],"yoast_head":"\r\n