We reiterate our NEUTRAL call on the sector. Plastic packaging players in Malaysia have put in place fairly aggressive expansion plans to take advantage of the eroding competitiveness of their overseas rivals. On a more cautious note, we expect a less favourable demand outlook for the sector in 2023 on the back of a slowing global economy. This will be partially mitigated by: (i) the easing of labour shortages, resulting in better productivity and efficiency gains, and (ii) improved margins as high-cost resin inventory is gradually depleted. Our top sector pick is TGUAN (OP, TP: RM3.28).

Market researcher Mordor Intelligence projects the global plastic packaging market to grow at a CAGR of 3.5% in 2022-2027. We believe local players could grow at a significantly higher rate as they gain market shares from overseas producers that are losing competitiveness due to rising production cost. This has even morphed into production curbs in Europe due to high energy cost or energy supply shortages or constraints after the RussiaUkraine war broke out. The plastic packaging players under our coverage have put in place fairly aggressive expansion plans to take advantage of the situation (see table below).

On a more cautious note, we expect a less favourable demand outlook for the sector in 2023 on the back of a slowing global economy, while supply-chain disruptions will continue to linger, affecting the operations of end-users (and hence their demand for plastic packaing). We expect a soft patch especially in 1HFY23.

This will be partially mitigated by: (i) the easing of labour shortages, resulting in better productivity and efficiency gains, (ii) improved margins as high-cost resin inventory is gradually depleted, and (iii) the declining cost of input resin (see Chart on next page).

Our sector top pick is TGUAN. We like the company for: (i) its earnings stability underpinned by a more diversified product portfolio, and (ii) its growth prospects backed by capacity expansion for its premium products (nano stretch films, courier bags, food wraps and industrial bags such as wicketed bags, and oil, flour and sugar bags).

Source: Kenanga Research - 17 Jan 2023