Maintain NEUTRAL. 1QCY20 results were mostly within, with SCGM performing above our expectation on better-than-expected margins from its new premium products. YTD, SCGM and TGUAN’s share price performance were ahead of peers, up 22% and 11%, respectively, on strong earnings momentum from better top-line and improved product mix. Raw material prices remain low, range bound between USD850-920/MT currently which is slightly below our expectations of USD900-1,000/MT, while there may be room for short-term increase alongside the recent bounce back in oil prices since hitting YTD lows in March 2020. All in, we believe CNP margins would maintain at current levels of c.6-9%. Furthermore, demand is expected to improve gradually as factories have resumed operations in May 2020 post the MCO, with utilised capacity increasing to 60-75% (vs. 40-60% during the MCO). We downgrade SCIENTX and TGUAN to MP (from OP) on positive share price performance of 5% and 15%, respectively, since our last company reports. We believe the sector warrants a NEUTRAL call as most positives have already been priced in, but our valuations reflect our caution of potential hiccups going forward as the Covid-19 pandemic is not over. Our applied valuations for plastic packagers are at -1.5 to -2.0SD to the 5-year historical average, while SCGM and TGUAN warrant better valuations of -0.5SD on expected positive earnings momentum during the pandemic.

Results within. Plastic packagers’ results were within expectations save for SCGM which came in above expectations on better-than-expected margins. This was better than the previous quarter when only three results were within, one below and one above. YoY, CNP trend was positive for most packagers at 30% (TGUAN), 44% (SCIENTX) to 410% (SCGM), while only SLP and TOMYPAK saw declining earnings due to lower top-line of 21% and 5%, respectively. Post results, we upgraded TGUAN to OP (from MP) and TP of RM4.00 on strong sales to export markets and improving margins, SCIENTX was upgraded to OP (from MP) and TP of RM9.70 (from RM6.50) while SCGM was upgraded to RM1.90 (from RM1.40) in the latest results.

SCGM the top gainer, up 22% YTD upon results exceeding expectations on improving margins. This is followed by TGUAN which was up by 11% YTD. We believe both companies beat their peers’ performance as they were able to shine during the tough months of Covid-19 with SCGM capturing strong margins from a new product lines suited for the pandemic (face shield and face mask) while TGUAN recorded above-average margins and management is bullish on sales momentum in coming quarters. Other packagers declined YTD by 6% to 32% due to weaker QoQ results

Source: Kenanga Research - 9 Jul 2020