We reiterate our NEUTRAL call as the export-dependent sector will not be spared the global economic slowdown over the immediate term. More competition from European manufacturers are also anticipated given the sharp fall in gas prices there. However, weaker sales volumes could be partially mitigated by the easing of certain cost pressures and on-going positioning by players towards higher-margin products. We remain positive on the sector’s longer-term prospects as players have fairly aggressive expansion plans to take advantage of the eroding competitiveness of their overseas rivals. Our sector top pick is TGUAN (OP, TP: RM3.28).

We maintain NEUTRAL on the export-dependent sector that will not be spared the global economic slowdown over the immediate term. We also see European manufacturers gradually making a comeback in a more significant way on the heels of the sharp drop in their gas prices, giving Malaysian manufacturers a run for their money.

Europe’s benchmark Dutch Title Transfer Facility (TTF) gas futures price has come off by >80% from the recent peak of above EUR300/MWh to below EUR40/MWh thanks to a mild winter in Europe (see Exhibit 1). Nonetheless, Malaysian producers may be able to draw some comfort from consensus that is still pointing to Dutch TTF gas futures price to average at EUR50-60/MWh in CY23.

On the other hand, Malaysian producers have to contend with rising energy cost following a hike in electricity tariff in Jan 2023. We believe this is manageable as typically electricity only makes up 4%-6% of total production cost of plastic packaging players. Also helping, is the Green Electricity Tariff (GET) programme of TENAGA (MP; TP: RM9.64) that offers an exemption to Imbalance Cost Pass-Through (ICPT) surcharge of 20.0 sen/kWh via a subscription charge of 3.7 sen/kWh (resulting in an effective savings of 16.3 sen/kWh). However, this offer to buy renewable energy is capped at 30% of total electricity consumption, subject to the availability of quota and only valid for six months ending 31 Jun 2023 for now. We understand that TGUAN, BPPLAS (MP; TP: RM1.23) and SCIENTX (UP; TP: RM2.99) have signed up for the programme.

Meanwhile, weaker sales volumes due to the global economic slowdown as well as the return of European manufacturers could be partially mitigated bythe on-going positioning by players towards higher-margin products such as premium stretch films and premium blown film packaging. Also helping, are softening cost of input resin (see Exhibit 2) as well as the easing in labour shortage that should boost productivity and efficiency.

Meanwhile, over the longer-term, 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 faster pace during the period as they gain market shares from overseas manufacturers that are losing competitiveness due to the rising production cost. Plastic packaging players under our coverage have put in place fairly aggressive expansion plans to take advantage of the situation (see Exhibit 3).

Our sector top pick is TGUAN. We like the company for: (i) its earnings stability underpinned by a more diversified product portfolio, (i) its earnings growth prospects underpinned by expansion in production capacity for premium products such as nano stretch films and courier bags, and a deeper penetration into the Europe and US markets, and (iii) its product innovation via R&D and collaboration with the likes of ExxonMobil to create more environmentally-friendly products.

Source: Kenanga Research - 4 Apr 2023