We maintain NEUTRAL on the export-dependent sector that will continue to feel the full brunt of the global economic slowdown over the immediate term. In addition, the sector is facing higher labour and energy costs. On a brighter note, these will be partially mitigated by the depletion of high-cost feedstock, more stable resin prices, restocking by end-users and the players’ positioning towards high-margin products such as nano stretch film. We remain positive on the sector’s longer-term prospects as players have put in place fairly aggressive expansion plans to take advantage of the eroding competitiveness of their overseas rivals. Our sector top pick is TGUAN (OP, TP: RM3.22).

We maintain NEUTRAL on the export-dependent sector that will continue to feel the full brunt of the global economic slowdown over the immediate term. In addition, the sector is facing higher costs, particularly, labour and energy. The higher labour cost stems from the upwards adjustment in the minimium wage last year, coupled with the reduction in the maximum weekly working hours to 45 (from 48) pursuant to the amendment of the Employment Act 1955 effective Jan 2023. Meanwhile, the full impact of the electricity tariff hike in Jan 2023 will be felt in 2HCY23 in the absence of an extension to the Green Electricity Tariff (GET) program which expires in Jun 2023 (based on the latest information).

Recall, under the programme, electricity users are offered an exemption to Imbalance Cost Pass-Through (ICPT) surcharge of 20 sen/kWh via a subscription charge of 3.7 sen/kWh (resulting in an effective savings of 16.3 sen/kWh). However, the offer to buy renewable energy is capped at 30% of the user’s total electricity consumption.

All these challenges will be partially mitigated by the depletion of high-cost feedstock and more stable resin prices, resulting in more favourable margins, restocking by end-users (who have depleted their inventories) and the players’ positioning towards high-margin products (such as nano stretch film).

Over the longer term, the prospects of the industry is bright, underpinned by a CAGR of 3.5% in 2022-2027 in terms of market size according to market researcher Mordor Intelligence. 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. Moreover, plastic packaging players under our coverage have put in place fairly aggressive expansion plans to take advantage of the situation (see Exhibit 1). In addition, local players such as TGUAN has invested in R&D for innovation and sustainability.

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 produce more environmentally-friendly products.

Source: Kenanga Research - 15 Jun 2023