We came away feeling confident on the overall plastics and packaging sector after the corporate day as most of the companies are expecting better sets of earnings in the coming years. In the nearer term, most of the packaging players are benefiting from: (i)lower raw material prices, and (ii) strengthening USD/MYR. We expect the players to show margin improvements in upcoming quarter. Furthermore, we like downstream companies, which are resilient to economic slowdown and expected to show better margin improvements. Within the industrial packaging space, we favour TGUAN (OP; TP: RM3.28) for: (i) its 2-year CAGR earnings growth of 10.7% backed by capacity expansion in the PVC food wrap segment, (ii) undemanding FY14-15 Fwd PER of 7.8x-6.6x (note that conversion of ICULS will only take place after two years, hence, there is no immediate dilution in the short-term), and (iii) decent FY14-15E net dividend yield of 3.8%-4.6% (vs. its closest peer SCIENTX’s dividend yields of 2.7%-3.0%). We also like niche products player SLP for: (i) earnings growth driven by MAXINFLAX product range that fetches higher margin and (ii) continuous innovation from the company that will bring higher net profit margin going forward and also differentiate them from peers like TGUAN. If we value SLP at 13x-14x FY15E PER, upside will be 19.7%-29.9% based on indicative target price of RM0.82-RM0.89. Within the consumer packaging space, we believe DAIBOCI (NOT RATED) and SCGM (NOT RATED) provide investors with defensive earnings growth (given resiliency in consumer product demand even in economic downturn). Between this two, we favour DAIBOCI for: (i) the decent upside from the current share price (implied upside is 11.2%-18.2% based on indicative valuation of RM4.76-RM5.06 based on 16x-18x FY15E PER) and constant dividend yield of average 3.0%. With that, we reiterate our OVERWEIGHT call on the Plastics and Packaging sector.
Our take from the conference. We organized a Corporate Day with the theme “Malaysia’s Plastics and Packaging Sector: Potential Eye of the Storm?” on Monday. The conference kicked off with the Malaysian Plastics Manufacturers Association (MPMA) sharing with us the general outlook of the Malaysian plastics industry, and followed by presentations by plastics and packaging companies; namely Thong Guan Industries Bhd (TGUAN, OP, TP: RM3.28), SLP Resources Bhd (SLP, NOT RATED), SCGM Bhd (SCGM, NOT RATED) and Daibochi Plastics and Packaging (DAIBOCI, NOT RATED). The event was well attended by approximately 47 institutional investors.
Key highlight from MPMA. Mr. Lim Kok Boon, the president of MPMA, presented to us the outlook of the Malaysian Plastics Industry (MP). The sector has been gaining traction especially as export plays gained momentum in recent months. Export numbers are becoming more compelling with 9M14 seeing a 12.6% rise in exports of MP vs. 6.4% in CY13 on the back of rising per capita consumption of resin. The sector’s turnover has also been steadily rising with a 3-year CAGR of 4.3%. Plastics packaging is part of our daily lives in every way and it is the largest segment of the plastics industry in Malaysia, c.45% of FY13 total turnover of RM18b. This includes flexible packaging (e.g. films and bags) and rigid packaging (e.g. bottles and containers). The main applications for plastic packaging are F&B, FMCG products, E&E components and packaging, changes in automotive components from metal to plastic to achieve fuel efficiency, building and construction (e.g. water tanks, baths, flushing cisterns). It is mainly an export market, particularly to developed countries where packaging plays a big component of marketing consumer goods; key export markets for the MP is EU, US and Japan. In fact, share of exports (in terms of turnover) for the industry has increased to 60% from 40% in 1990s. Exported plastics products are mainly for films and sheets (33.8%) and bags (32.4%) while the other products are fragmented.
Downstream players will see more resilient demand. Although we are expecting a more challenging economic landscape (e.g. cost pressures, global uncertainties arising from lower crude oil), most of the downstream plastics and packaging companies like SCGM and DAIBOCI’s demand are least likely affected as most of their clients are F&B companies, which tend to see more resilient demand. Moreover, most of the sales of other players (TGUAN and SLP) are for the export market which is unlikely to be affected by slowdown in domestic consumption. Moreover, the demand of plastics packaging is expected to grow in tandem with population growth and urbanization, based on historical statistics.
Beneficiary of low crude oil prices. Our analysis suggests that the relationship between crude oil prices and resin prices are positively correlated (more than 90% correlation over a 10-year period). The recent plunge in crude oil prices has sent raw materials resin (LLDPE, LDPE and HDPE) prices on a downward trend. Moreover, the upcoming new capacities from Middle East and North America, coupled with cheaper source of feedstock (ethane compared to naptha) may further drag down the resin prices. We gather that there is a 3-6 months lag effect for plastics and packaging companies to show EBIT margin expansion when resin prices fall. In addition, a rise/decline in raw material prices will have minimal effect on margins for upstream/shorter contract lead time players (ie film makers like SCIENTX, TGUAN and BPPLAS that adjust the selling price of their products according to latest raw material prices); however a drop in resin price will have a positive effect on the dowstream/longer contract lead time players (especially for players like SCGM, DAIBOCI and SLP). Thus, we believe that plastics and packaging companies should show short-term margin improvement in upcoming 1Q15 results season which will also partly spill into 2Q15 due to the lag effect of raw material costs.
Positive on strengthening USD/MYR. Export of plastic products manufactured in Malaysia has been increasing for the past 5 years to RM10.7b in 2013 (+28.9%). Most of the plastics and packaging players are export-oriented, and thus, a strengthening in USD/MYR generally has a positive impact on these players. Notably, raw material costs are mainly denominated in USD, which will serve as natural hedges for packaging players like TGUAN and SLP. All in, we understand that most of the companies will still showcase forex gain. For the corporates that attended the corporate day, SCGM benefited the most from the stronger USD due to its USD denominated sales, whilst cost is denominated in MYR, which will boost revenue with better profit margins. The sector is also least impacted by GST since export-oriented packaging players are expected to be zero-rated.
Not without challenges... While the current strong USD and low crude oil environment is beneficial to the plastics packaging players in the near term, the sector also has its fair share of challenges. Minimum wage policies for migrant workers did result in a 30%-40% wage hike for general workers (mainly foreign). Note that labour cost makes up 4-8% of total revenue. But the more pressing issue is the shortage of workers in both the skilled and unskilled arena while hiring foreign workers is increasingly difficult due to government policies. Energy costs is also rising and is more of a longer-term concern considering that the sector will enjoy feed cost benefits and higher ASPs on the back of a strong USD.
…but overcoming it with innovation…Operationally, these players have had to improve on quality throughput to increase overall productivity, which includes automation or machine upgrades, particularly when labour has become an on-going issue, according to MPMA. This includes relocating manufacturing outfits to cheaper locations or more strategic ones (e.g. nearer to ports or customers distribution points), seeking new markets, especially since developed countries have higher packaging needs and ultimately, building long-term relationship with key clients to ensure demand sustainability and product suitability. Packaging players also have to remain nimble as product requirements evolve quickly, requiring them to come up with more innovations, particularly when it comes to reducing the weight of packaging materials. This value-add strategy ultimately results in higher margins and also helps differentiate one player from another. Clearly, the Malaysian Plastics Industry has transformed from being low-end manufacturers towards high-end industrial applications or the export-oriented sector.
…and M&As. There are no companies with a dominant market share in plastics industry. Malaysia only accounts for <1.0% of the global plastics industry’s total turnover of c.RM2.5t in FY13. While demand of plastic products has increased on the back of packaging demand, we note that the numbers of Malaysian plastics manufacturers are declining as there are only 1,300 plastics manufacturers as of Sep-2014 vs. 1,400 back in 2010. One of the major strategies used is M&A to gain scalability and economies of scale, and this also extends to the paper and tin-can packaging players as well. In the past 5 years, Japanese companies have been actively acquiring controlling stakes in Malaysian packaging companies (e.g. Oji Paper’s acquisition of GS Paper in Mar 2010 and United Kotak Bhd in Oct 2010). For the Japanese, we gather that they prefer to control the whole supply chain which enables better cost control; this came about when the Japanese Yen strengthened significantly, resulting in many Japanese investors buying overseas assets. Locally, we observe recent consolidation in this segment (e.g.: Scientex Bhd’s acquisition of GW Plastics Holdings Bhd in Oct 2012 and Can-One Bhd’s stake in Kian Joo Can Factory Bhd in Sep 2009) as packaging players are trying to capture market share. On average, the M&A valuations of acquired companies are 10.1x based on a range of 6.4x-12.0x Fwd. PER with a market cap range of RM67m-RM1.4b. However, it was highlighted that many of these manufacturers are family-owned, which may prove challenging in M&A situation.
Reiterate our OVERWEIGHT on Plastics Packaging. Post-conference, we have a better understanding of the plastics and packaging sector in Malaysia and we generally think that this sector in Malaysia is under-appreciated by the investment community. We believe the sector will benefit from the falling raw material cost and the weakening MYR.
Within the industrial packaging space, we favour TGUAN (OP; TP: RM3.28) for: (i) its 2-year CAGR earnings growth of 10.7% backed by capacity expansion in the PVC food wrap segment, (ii) undemanding FY14-15 Fwd PER of 7.8x-6.6x (note that conversion of ICULS will only take place after two years, hence, there is no immediate dilution in the short-term), and (iii) decent FY14-15E net dividend yield of 3.8%-4.6% (vs its closest peer SCIENTX’s dividend yields of 2.7%-3.0%).
We also like niche products player SLP for: (i) earnings growth driven by MAXINFLAX product range that fetches higher margin and; (ii) continuously innovation from the company will bring them higher net profit margin going forward and differentiate them from peers like TGUAN. If we value SLP at 13x-14x FY15E PER, upsides will be 19.7%-29.9% based on indicative target price of RM0.82-RM0.89.
Within the consumer packaging space, we believe DAIBOCI (NOT RATED) and SCGM (NOT RATED) provide investors with defensive earnings growth (given resiliency in consumer product demand even in economic downturn). Between this two, we favour DAIBOCI for: (i) the decent upside from the current share price (implied upside is 11.2%-18.2% based on indicative valuation of RM4.76-RM5.06 based on 16x-18x FY15E PER) and constant average dividend yield of 3.0%.
Source: Kenanga
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Icon8888
amazing article ! all you need to know about plastic packaging is here !!!!
must read !!!!!!
2015-01-22 12:53