Upgrade to NEUTRAL (from UNDERWEIGHT) post upgrading TOMYPAK and SLP’s calls while upside will be capped by the lack of re-rating catalyst and margin-crimping high-cost environment. 4QCY18 results were mixed with TGUAN coming in above on improved product sales mix, but TOMYPAK underperformed on weaker top-line and higher raw material costs. Ytd, share prices were mostly reflective of recent results, with our universe’s top gainer being TGUAN (+15.5% YTD) and top decliner being TOMYPAK (-13.2% YTD). 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 continue to compress margins. Average resin prices are currently range-bound between USD1,000-1,300/MT, while we are slightly more conservative with our resin cost estimate of USD1,200-1,400/MT given resin price volatility and its recent upward trend. All in, we upgrade (i) TOMYPAK to MARKET PERFORM (from UP) as the share price had retraced to our target price of RM0.495, (ii) SLP to OUTPERFORM (from MP) as its share price has declined 18% since our last report which we think is unwarranted as SLP had consistently met/exceeded expectations and maintained the strongest margins among our coverage stocks. Our preference is SLP as it is currently trading at an attractive valuation while its earnings and margins record are superior to peers.

Mixed 4QCY18 results. Plastic packagers’ results were mixed with TOMYPAK coming in below expectation due to weaker top-line and higherthan-expected raw material costs, while TGUAN outperformed on improved product sales mix. SCIENTX is deemed broadly within expectation, due to lumpy progress billings in its property segment. This quarter’s results saw less surprises vs. 3Q18 when only 1 came within. YoY-Ytd, better sales volume led to improved top-line growth of 4-9%, except for TOMYPAK which sales softened due to lower sales volume and selling prices. At CNP level, eroding EBIT margin saw SCIENTX and SCGM’s CNPs declined. Conversely, improved product sales mix in TGUAN and better economies of scale for SLP saw their bottom-lines strengthening by 13% and 39%, respectively. QoQ, TGUAN saw CNP growth of 140% as they benefited from strengthening of USD dollar in 4Q18 (c.+2%) that resulted in better selling prices. Positive tax recorded by SLP and higher sales volume by SCGM saw CNP growth of 19% and 20%, respectively. On the other hand, lower property revenue recognition by SCIENTX saw CNP declining by 27%. TOMYPAK recorded CNL of RM3.7m on the back of lower overseas revenue contribution and higher raw material costs.

Share prices mostly reflective of recent results. Plastic packagers’ share price movements in 1QCY19 were a mixed bag with SLP (5.2% Ytd) and TGUAN (15.5% Ytd) gaining Ytd, as results met and exceeded expectations, respectively. Meanwhile SCIENTX, TOMYPAK and SCGM declined between 3.3% to 13.2% Ytd due to results missing expectations and also due to compressed margins and volatile earnings. We believe that the gain in the sector is also in tandem with the broader market recovery (FBMSC +13.3% Ytd).

Capacity expansion on track with some players focusing on ramping up utilisation. Capacity expansion across the sector is likely to drive top-line growth progressively over the longer run, assisted by continuous demand for niche plastic products (i.e. from FMCG and healthcare segments), and increasing usage of stretch film driven by Industry 4.0. We expect SLP to gradually increase annual capacity by 58% in FY21, SCGM by 65% in 4Q19 and TGUAN by c.6% in FY19-20. SCIENTX is focused on ramping up utilisation, targeting above 70% over the next few years. For TOMYPAK, we expect no new capacity expansion until FY21 after spending a total capex of RM166m for the new Senai factory, and we think their focus now is more on ramping up utilisation of its capacity.

Source: Kenanga Research - 5 Apr 2019