Maintain NEUTRAL. Plastic packagers had a rough patch in FY18 and 2019 thus far with mixed results, mostly due to volatile EBIT margins caused by rising cost for raw material, utilities, labour and fit-out cost, and a less favourable product mix. Only SLP (+22% YTD) and TGUAN (+14% YTD) saw YTD share price gains (at our report cut-off date of 20th September 2019) as their results met expectations. We believe plastic packagers are currently at the crossroads. This is because even after pricing in most of the current low resin cost levels of USD900-1,100/MT, we are of the opinion that formulating the right product mix would be a critical factor determining robust margin growth or regression under the challenging market environment. As such, EBIT margins in coming quarters are key factors and we may look to increase earnings estimates and valuations on consistent margins and earnings deliveries. We made no changes to earnings, but upgraded TGUAN to OP (from MP) on a higher TP of RM3.00 (from RM2.45) post increasing our valuations as we believe margins are gradually improving back to normalised levels of 6-8%, from lows of 4-5% in FY18. We maintain our sector call as we remain cautious on margin pressure, and believe that we have accounted for most of the foreseeable positive factors for now.

Mixed results. Plastic packagers’ results were a mixed bag with three coming in below (SCGM, TOMYPAK and SCIENTX), and two within (SLP and TGUAN). This quarter is slightly worse off than the previous quarter when only two came in below (TOMYPAK and SCGM). The reason for the weak results were weaker top-line and higher-than-expected raw material and fixed costs, as well as weaker margins during the quarter. YoY-Ytd, TGUAN is the only stock among our plastic packagers that saw bottomline growth (+43%) due to better operating margins. SCGM, SCIENTX, SLP, and TOMYPAK all saw decline ranging from 1% to 789%, attributable to a variety of reasons such as higher raw material and finance cost, less favourable product mix, and higher effective tax rate. QoQ, most packagers saw flattish to declining bottom-lines (-2% to -946%) on weaker product mix and rising cost, while SLP was the only one that recorded CNP growth (+28%) on a better product mix and lower raw material cost. TOMYPAK continued to post losses albeit narrowing, while a recent auditors’ report indicated that material uncertainty exist which may cast doubt on the Group’s ability to continue as a going concern.

Top gainer SLP up 22% YTD. As of our report cut-off date (20th September 2019), SLP, our preferred pick during the quarter was the top gainer, up 22% YTD. We believe the strong results were due to results consistently meeting expectations while also commanding premium margins of 15% EBIT vs. other plastic packagers under our coverage of 5-7% (save for TOMYPAK). This was followed by TGUAN which appreciated 14% YTD as its results also met expectations. Meanwhile, SCIENTX, SCGM and TOMYPAK saw YTD declines as results came in below expectations.

Source: Kenanga Research - 4 Oct 2019