Maintain UNDERWEIGHT. 3Q18 results were mixed with SCGM coming in below on margin pressure while TGUAN came within. SCIENTX, SLP and TOMYPAK outperformed on various reasons such as better property margin, improved economies of scale and unexpected positive tax, respectively. Ytd, packagers’ share prices declined by 32-58% (save for SCIENTX), mirroring FBMSC’s decline of 32%, mainly due to consistently weaker earnings, particularly during 1H18 (save for SLP) and also a sector de-rating in tandem with the FBMSC. Moving forward, we are less concerned of top-line growth with capacity expansion plans coming to fruition, but remain cautious on the volatile raw material prices, the variability of favourable product mix and higher operating expenses that caused margin compressions in recent quarters. Average resin prices have increased c.8% Ytd, averaging at USD1,150-1,300/MT, which is still within our full-year estimate of USD1,200-1,400/MT. Recent QoQ declines in resin prices may not reflect immediately in improved earnings as there may be inventory held at higher cost. All in, we maintain all calls and TPs save for SCGM, for which we now ascribe a MARKET PERFORM (from UP) as its share price had drifted closer to our TP since our last report. SLP, which has consistently met or exceeded earnings expectations and maintained the strongest margins under our coverage, remains our only OUTPERFORM call.

Mixed 3QCY18 results. Plastic packagers’ 3Q18 results were mixed with SCGM coming in below due to margin pressure, and TGUAN coming in within. The outperformers were SCIENTX, which outperformed on better property margin, SLP on better operating margin from improved economies of scale, while TOMYPAK recorded unexpected positive tax. This quarter saw improvement vs 2Q18 when only 2 came within and 3 below. YoY-Ytd, better sales volume led to improved top-line growth of 3-9%, except for TOMYPAK due to lower sales volume and selling prices. Bottom-line-wise, TGUAN, SCGM and TOMYPAK saw declines ranging from 39% to 80% due to margin compression from higher operating expenses and financing cost. Meanwhile, SCIENTX and SLP’s bottom-line increased by 14% and 33%, respectively, on better margins. QoQ, SCGM and TOMYPAK returned to the black on better sales while SCIENTX saw growth (+48%) in earnings mainly on better property products’ margin. TGUAN was only marginally better (+1%) due to lower operating losses from its F&B segment. Only SLP saw decline in earnings (-5%) on lower operating margin from changes in its sales mix. All in, we upgrade earnings and TPs for SCIENTX and SLP on stronger results and downgrade TPs and earnings for SCGM. TGUAN and TOMYPAK were kept unchanged.

Share prices mostly declined in light of weak results, ranging from 32% to 58% Ytd, similar to the FBM Small Cap Index’s decline of 32% Ytd (as at our report cut-off date on 14th Dec 2018). We believe the weakness were mainly due to declining earnings, particularly during the 1H18 results season (except for SLP), while we believe the sector also declined in tandem with the FBMSC de-rating. SCIENTX is the only outlier under our coverage, which saw share price improvement by 9% Ytd. Note that in 1H18 (June), SCIENTX declined to a low of RM6.55 (-24% from start of the year) before staging a rebound, likely due to positive sentiment for its recent acquisition of a stake in DAIBOCI. As for SLP, we believe the sell-down is unwarranted (-34% Ytd) as it has consistently met or exceeded earnings expectations over the past four quarters, unlike its peers.

Capacity expansion on track. Capacity expansion across the sector is expected to deliver higher top-line growth progressively over the longer run, assisted by continuous demand for niche plastic products (i.e. from FMCG and healthcare segments), and increased use of stretch film driven by Industry 4.0. We expect TOMYPAK to increase capacity by 44% in FY20-21, SLP by 58% in FY20, while TGUAN by c.5% p.a. in FY18-19E and have recently commissioned a stretch film production line in 4Q18, and SCGM by 65% in FY20. SCIENTX will continue to focus on ramping up utilisation, targeting 70% over the next few years.

Source: Kenanga Research - 4 Jan 2019