We reiterate our NEUTRAL view on the sector. There was a slight improvement (against expectations) in the just concluded 2QCY22 results season. The results showed volume expansion from improved productivity and increased demand as economies reopened, and ASP expansion due to cost-push factors. Barring a sharp deterioration in the global economic outlook, we believe manufacturers will continue to ride on volume expansion as the world comes out the other end of the pandemic. Plastic product producers, in particular, may also benefit from margin expansion on falling resin cost while the price of end-products holds up longer. Our top pick for the sector is TGUAN (OP; TP: RM3.99).

2QCY22 results primarily within expectations. There was a slight improvement (against expectations) in the just concluded 2QCY22 results with 67% and 33% coming in within and below our forecasts, respectively, vs. 50% within and 50% below in the preceding quarter (see table below). Out of a total of six manufacturing companies under our coverage (comprising mainly makers of plastic products, one manufacturer of automotive parts, and one manufacturer of boilers), all met our forecasts except SLP (on low productivity due to labour shortage) and SCIENTX (as margins were hurt by supply-chain disruptions and high input costs).

The results showed volume expansion from improved productivity and increased demand (for food packaging, industrial packaging, automotive parts and boilers) as economies reopened. The results also revealed ASP expansion due to cost-push factors (vs. demand-pull factors), particularly, the higher input cost (for instance, resin for plastic products) and labour cost (on the heels of the hike in the minimum wage).

Barring a sharp deterioration in the global economic outlook, we believe manufacturers will continue to ride on volume expansion as the world comes out the other end of the pandemic. Plastic products manufacturers may benefit from margin expansion on lower resin prices in tandem with the fall in oil prices (see chart on Page 2), while the price of plastic products (particularly those in the premium segment) holds up longer. The demand for automotive parts will remain stable underpinned by strong vehicle sales over the next 6-9 months as buyers take delivery of their bookings before 31 March 2023 to enjoy the Sales & Service Tax (SST) exemption. Similarly, the demand for boilers will remain good as palm oil players embark on capital spending backed by strong CPO prices.

Our top pick for the sector is TGUAN for: (i) strong demand for its products and hence better ASPs for its non commoditised namely nano stretch film and courier bags, (ii) its capacity expansion plan (completed in 2QCY22, raising capacity by c.30%), mainly catering to premium products (such as stretch films, blown packaging films and courier bags) to fuel medium-term growth, and (iii) increased competitiveness in the export market on a weak MYR.

Source: Kenanga Research - 9 Sept 2022