Maintain NEUTRAL. For 3QCY19, plastic packager’s results were a mixed bag with three coming in above, one within and one below on lumpy top-line growth for SCIENTX and improved CNP margins for TGUAN and SCGM. YTD, TGUAN was the top gainer, up 59% (at our report cut-off date of 20 December 2019) after accorded better valuation on better margins and following a strong 3QFY19 results which exceeded expectations, while SCGM was also up by a strong 36% YTD on margin improvements and lower-than-expected tax rates. For now, we believe we have priced in current low resin cost levels of USD900- 1,100/MT which is slightly more conservative than current level of USD850-1,000/MT p.a. Going forward, we believe plastic packagers will need to push for strong top-line growth by increasing utilisation rate to >75% (from c.60-70%) and improving product mix which would be critical in ensuring margin growth under the challenging global market environment. We made no changes to earnings or calls. Our preferred picks are TGUAN (OP; TP: RM4.10) as we believe its margins are gradually improving back to normalised levels of 6-7%, from lows of 4-5% in FY18, and SLP (OP; TP: RM1.45) on consistently superior margins, warranting better valuations. We maintain our sector call as we remain cautious on margin pressure from varying product mix, and believe that we have accounted for most of the foreseeable positive factors for now.

Mixed results. Plastic packagers’ results were mixed with three coming in above (on margin improvements, mostly on better product mix and lower tax rates), one within (SLP) and one below (TOMYPAK). This was better than the previous quarter when two came in below (TOMYPAK and SCGM) and 3 within. YoY-Ytd, only SCIENTX and TGUAN saw top-line growth at 24.8% and 9.5%, respectively, while others saw decline to top-line on waning demand as customers adopt a wait-and-see approach amidst the global uncertainties. However, due to better product mix and lower tax rates, bottom-line was up for SCIENTX (+16%), SCGM (+100%) and TGUAN (+59%) but declined marginally for SLP while TOMYPAK continued to be loss making. Post results, we upgraded earnings and TP for TGUAN, SCIENTX and SCGM on better results. We also upgraded SLP’s call on an unchanged TP due to attractive valuations, while TOMYPAK’s call and TP remained unchanged on trough PBV valuations.

Top gainer TGUAN up 59% YTD. TGUAN was our top gainer, up a strong 59% YTD following our Buy call in our 4QCY19 Plastic Strategy report (dated 4th October 2019, Seeking Convincing Margin Improvements) when we upgraded our call and TP on stable earnings and margin improvements, followed by a 2nd round of TP upgrade when its 3QFY19 results exceeded our expectations. This was followed by SCGM (+36% YTD) on better earnings and improving margins (5.4% CNP margin in 1HFY20 vs. 2.3% in 1HFY19). SCIENTX and SLP were up by a decent 6.6% and 2.6% YTD, respectively, while TOMYPAK declined 10.6% YTD on weak earnings.

Source: Kenanga Research - 6 Jan 2020