We maintain OVERWEIGHT for the sector. Forex impact will likely be normalised in the upcoming quarters when cheaper resin inventories are being utilised. In the near term, plastic packaging players are expected to see only marginal growth in tandem with slower recovery in global trades. Over the long term, supported by lower cost, greater economies of scale and product innovation especially towards sustainable plastic packaging materials, local players are aiming for larger market shares in overseas markets. Our sector top pick is TGUAN (OP; TP: RM2.58).

Demand to skew towards more sustainable packaging. Concerns on the environment over plastics are shifting the focus towards managing plastic waste rather than eliminating plastics altogether, given their essential role during the Covid-19 pandemic which had reinforced the usefulness of plastic in personal protective equipment (e.g. safety overalls, face covers or syringes), packaging/storing essentials such as medicine or food economically yet safe from contamination and facilitating deliveries of online shopping. This has led to increased circular economy initiatives and sustainable packaging solutions. Investments in innovative packaging are crucial for reduced waste collection, sorting, and recycling.

Malaysian firms' growth faster than average helped by innovation. Companies like BPPLAS (OP; TP: RM1.42) and TGUAN (OP; TP: RM2.58) have been gaining traction with their nano stretch films, while SLP (OP; TP: RM1.00) is seeing increased customer interest in its machine direction-oriented (MDO) PE mono films. SLP is also actively promoting its sustainable packaging solutions in ASEAN countries, capitalising on the demand for recyclable materials by SE Asian manufacturers from customers in Europe or the US. In aggregate, these firms are growing at a pace of 7% CAGR profit growth over the next two years, outstripping the industry growth outlook. The global packaging market is also set to grow at around 4% CAGR to reach USD1.4t by 2028 with flexible plastics likely to grow faster at 5% CAGR, outpacing metal, glass and even slightly ahead of paper-based packaging. The demand for flexible packaging is driven mainly by its durability, flexibility, and cost-effectiveness. The OECD Environmental Directorate projects that plastic packaging usage will triple by 2060 from current levels.

Outsized forex impact in 3Q24; lagged impact of cheaper-cost resin will kick in. Malaysian plastic exporters sell products and purchase resins in the USD. As such over the long term, there is a natural hedge against the MYR/USD fluctuations. However, considering the rapid strengthening of the MYR in 3Q 2024, and some resin inventories acquired when the MYR was weaker, the industry saw a hit to overall earnings. The benefits of cheaper resins will not be immediate and are expected to surface only over the next quarter or two as new lower-cost inventory replaces the old.

2025 orders could see support from Japan. Following some restocking orders, the demand for plastic packaging in CY25 is expected to see only a marginal increase, in tandem with slower recovery in global trades. On the bright side, the strengthening of the yen enhances buying power in Japan, potentially driving demand for higher-quality, premium products from Malaysian producers. Meanwhile, in the domestic market, the wait-and-see sentiment persists given expectations on the decreasing trend of resins prices, causing softer demand.

We acknowledge potential downside risks to margins due to: (i) increasing operating costs, including labour and electricity, (ii) rising freight costs and (iii) the impact on ASPs from the recent strengthening of the MYR. However, a shift towards highmargin premium products, increased automation and investment in solar energy installation could partially mitigate these cost pressures. We also believe much of the negativity or concerns surrounding the sector such as temporary margins compression and rising logistics costs have been reflected in the share prices given the stocks under our coverage are trading at an average of 10%−20% discount against their 10-year historical averages. As such, the sector now presents opportunities for long-term investors to accumulate.

Our sector top pick is TGUAN, whose share price, we believe, has been adversely affected by the knee-jerk reaction to forex. We continue to like TGUAN due to: (i) its aggressive push into Europe and US markets with environmentally friendly, high-performing products, and (ii) its expansion plans for premium products, such as nano stretch films, food wraps and some industrial bags (wicketed bread bags, oil/flour/sugar bags).

Under our coverage, we have two more stretch film players, namely BPPLAS and SCIENTX (MP; TP: RM4.15), which are also developing innovative packaging solutions. We like BPPLAS for its: (i) strong foothold in the SE Asia market which is expected to remain resilient despite global economic uncertainties, (ii) strong cash flows and balance sheet (a net cash position) that will enable it to weather downturns better, and (iii) long-term capacity expansion in high-margin premium stretch film and blown film products, positioning it to capitalise on the next up-cycle. We continue to favour niche products player SLP for its: (i) product mix which focuses on high-margin, non-commoditized products such as kangaroo pouches and mono films, and (ii) robust cash flows and a strong balance sheet (a net cash position), enabling consistent and generous dividend payments.

Source: Kenanga Research - 16 Jan 2025