During the post-result briefing yesterday, management shared that it has adjusted selling prices across its product range to mitigate the heightening resin price, which has surged to the highest level since 2011. It also introduced a new tray product called “USA Modal” mainly catered for the US market and is in the midst of securing various approvals needed. On the allocated capex of RM20m for FY22, management plans to increase its extrusion capacity by 6m kg/ per year, bringing the total annual capacity to 73.6m kg. Maintain Outperform call with an unchanged TP of RM2.62.

• Driven by F&B packaging sales growth. During the third quarter, its revenue rose 23.2% YoY to RM52m. The F&B segment is the largest contributor, accounting for 83.1%. Management also named i) lunch boxes, ii) degradable lunch boxes, iii) OPS trays, iv) cups and iv) fruit trays as its best-selling F&B packaging products. The “other” segment, which consists of electronics, medical and other packaging climbed 33.6% YoY to RM3.2m. However, extrusion sales dipped 7.7% YoY to RM6.5m. Personal protective equipment (PPE) dipped from RM1.6m in 2QFY21 to RM0.8m. Sales from local markets grew 27% YoY to RM40.8m, led by additional 37 new clients while export markets increased by 11% YoY to RM21.8m on the back of 10 new international customers from Singapore, Australia to New Zealand.

• Improvement in margins. EBITDA margin expanded from 16.5% to 19.7% in 3QFY21 on the back of i) favourable sales mix, ii) lower operating costs from the plant consolidation despite being hit by higher resin cost. 9MFY21 EBITDA margin rose from 15.4% to 22.6% as EBITDA jumped 64.9% YoY to RM40.9m. Meanwhile, 3QFY21 resin cost fell 6% YoY but was up 18% QoQ. For 9MFY21, it was down by 14% YoY.

• 7 rounds of ASP adjustment since Nov 2020. Resin prices have hit its highest levels since 2011 due to rising oil prices and tight supplies in the market. The Group has swiftly adjusted its average selling prices by more than 7 times since Nov 2020. It is worth noting that it is easier to raise selling prices for standardized products compared to customized products as the latter is more competitive. On the positive side, management guided that resin prices are likely to come off in the coming months but it is unlikely to revisit the low levels last year. Despite the adjustments, we believe there will be lagged effect and could take up to 2 quarters to reflect the normalized margin. Besides that, the Group is also streamlining its operations by shifting focus to higher value-added products to help mitigate the margin pressure.

Source: PublicInvest Research - 31 Mar 2021