We maintain OVERWEIGHT for the sector. Plastic packaging players should see sustained demand as we enter the last quarter of CY24, underpinned by recovery in manufacturing, albeit modest and year-end consumer spending. Over the long term, backed by lower cost, greater economies of scale and product innovation especially towards sustainable plastic packaging materials, local players are aiming for larger market shares from overseas producers. Our sector top pick is TGUAN (OP; TP: RM2.86).

The OECD Environmental Directorate projects that plastic packaging usage will triple by 2060 from current level. Separately, the global packaging market is also set to grow at around 4% CAGR to reach USD1.4tr by 2028 with flexible plastics likely to grow faster at 5% CAGR, outpacing metal, glass and even slightly ahead of paper-based packaging. The popularity of flexible packaging is driven mainly by its durability, flexibility, and cost-effectiveness. Environmentally, once the energy requirement and emission linked to the transportation or recycling of heavier metal or glass packaging are taken into consideration, the case for plastic packaging is even stronger. For Malaysia, we believe our local plastic packaging players could outpace global growth by capturing additional share from overseas producers due to:(i) lower cost inputs, from land to labour as well as energy, (ii) greater economies of scale as Malaysian plastic packaging players have expanded significantly in the past decade, and (iii) the readiness to invest, fine tune, as well as market more new innovative products, such as the more environmental friendly nano stretch film and mono film.

Following some restocking orders, the demand for plastic packaging in the nearer term is expected to see only a modest increase due to still slow global trade. Plastic packaging demand is closely tied to (i) the health of the economic activities, (ii) demographic growth as well as (iii) consumer spending and lifestyles (e.g. the rise of e-commerce). Hence, as the yearend holiday season approaches, we anticipate a potential little boost in demand for plastic packaging across various sectors, including food and beverage, retail, and logistics. Furthermore, the surge in tourist arrivals to Malaysia (28.9% YoY increase for 1HFY24) is expected to boost local demand for plastics, benefiting local manufacturers through increased consumption driven by the tourism sector.

The recent strengthening of the Malaysian Ringgit (MYR) presents a mixed outlook for plastic manufacturers, considering impact of both exports and imports. We watch for compression in export margins as USD revenue translates into fewer Ringgits on mainly export sales for the names we cover. On the positive side, a stronger MYR lowers raw material costs, such as resin priced in USD, and can be balanced out by improving cost efficiency or inventory management. Additionally, the strengthening of Japanese Yen enhances buying power in Japan, potentially driving demand for higher-quality, premium products from Malaysian producers. On the domestic front, the “wait and see” sentiments persist as expectations on the decreasing trend of resins prices, causing softer demand.

As industries adopting sustainable practices in response to environmental concerns and regulatory pressures, demand for eco-friendly packaging is rising. TGUAN (OP; TP: RM2.80)’s Maxstretch Regen, a new packaging solution containing 30% post-consumer recycled (PCR) content, aligning with this trend. By incorporating recycled materials, it reduces resource consumption, lowers greenhouse gas emissions, and minimizes landfill waste, supporting the circular economy. Additionally, sustainable packaging often offers long-term cost savings, providing a more economical alternative to traditional materials.

SLP (OP; TP: RM1.05), is aggressively expanding its fully recyclable mono film (MDO PE) into new markets, leveraging its pioneer status to capitalize on the shift toward sustainable packaging. Japan, a key market contributing 40% of plastic packaging sales and 65% of group turnover in FY23, offers further growth potential with the strengthening yen driving demand for SLP’s high-quality, sustainable products like kitchen and garbage bags.

To boost their profitability, players have shifted towards a higher-margin niche products by adding more value. BPPLAS (OP; TP: RM1.42), for instance, has launched a new blown film packaging product for the F&B sector, backed by advanced printing and cutting technology, targeting brand owners to capitalize on the near-term increase in consumer spending. SCIENTX (MP; TP: RM4.15), also invested into a new co-extrusion tandem line which targets F&B and FMCG liquid packaging, enhancing cost efficiency by laminating multiple layers in a single process.

We acknowledge potential downside risks to margins due to: (i) rising operating costs, including labour and electricity (ii) higher freight costs due to shipping diversion from the Red Sea. However, focus on the higher-margin, value-added premium products, increased automation and investments in solar panel to save energy could help offset these cost pressures.

Our sector top pick is TGUAN (OP; TP: RM2.80). We like the company for: (i) its earnings growth prospects underpinned by expansion plans for premium products, such as nano stretch films, food wraps and some industrial bags (wicketed bags, oil/flour/sugar bags), (ii) its aggressive push into the European and US markets with high-performing products, and (iii) its product innovation via R&D and collaboration with the likes of ExxonMobil to produce more environmentally-friendly products.

Source: Kenanga Research - 2 Oct 2024