Backed by capacity expansion and better margins growth that would lead to stronger earnings, the plastics and packaging industry could pique investors’ interests in coming months, according to Kenanga Research.

While a sector re-rating was due, the research house in reiterating an “overweight” call, said the industry would fare well for investors due to the favourable foreign exchange rates and low raw material prices.

Shares of Scientex Bhd and SLP Resources Bhd advanced on Friday after Kenanga raised the plastics and packaging sector to “overweight”, from neutral.

It thinks that resin, the raw material used by the industry is expected to remain flat at US$1,100 per tonne to US$1,200 per tonne in the first half of calendar year 2016 till the second half of 2016, while it made no changes to the US dollar exchange rate assumptions of RM4.10/US$1 in financial year 2016 (FY16) to 2017 forecast.

“Some of the stocks’ recently quarterly performance have improved year-on-year, beating analyst expectations with share price gains of 30% to 43% year-to-date (YTD), exceeding the broader market (FBM KLCI -2% YTD) and FBM small cap (-5% YTD).

“This makes the sector a preferred choice for investors, especially in coming quarters,” said Kenanga in its published report.

Kenanga noted that Thong Guan Industries Bhd and Scientex Bhd’s first quarter 2016 results came in above consensus and its expectations, mainly due to better-than-expected net margins from higher export sales and stronger contribution from premium products. SLP Resources Bhd’s performance fell within its mark.

Elaborating on long-term earnings growth via capacity expansion, it said, SLP and Scientex were growing their capacity beyond the present levels, with SLP’s manufacturing plant to be ready by financial year 2018 (FY18).

Scientex, it noted, intended to double its capacity at its newly acquired plants in Ipoh, which already had begun contributing to earnings in the second quarter of 2016.

Although Thong Guan was not aggressive on capacity expansion, it is seen to be consistent in its investments in research and development to improve sales and margins on existing products, said Kenanga.

“But we are increasing our earnings estimates for Thong Guan on stronger margin assumptions. The company has delivered sequential quarterly improvement in margins over the last four quarters, expanding from 12% gross margins to 17% with core net margins expanding from 3% to 9%,” it noted.

Additionally, with the other efforts taken by Thong Guan, it raised its earnings estimates by 24% to 25% in FY16 to FY17 forecast to RM51.4mil to RM56.6mil on conservative margin expectations and earnings per share to 27.9 sen to 30.8 sen after fully diluting its share base for warrants and ICULS.

Using Daibochi Plastics and Packaging Industries Bhd as its base, it reckoned that SLP deserved richer valuations of 21.5 times FY17 forecast price-to-earnings (PER), while Scientex Bhd should be valued at 17.6 times calendar year 2017 forecast PER and Tong Guan at 14.6 times FY17 forecast PER.

In terms of return on equity, SLP has the highest at 24% in FY15, with an estimate of 23%-24% for FY16 to FY17 forecast, while Scientex’s stood 19% in FY15 with a forecast of 24%-23% for FY16-FY17 forecast.

Thong Guan’s ROE stood at 10% in FY15, with an estimate of 13%-14% for

FY16-FY17 forecast, while Daibochi at 15%.

Meanwhile, balance sheet wise, SLP and Thong Guan kept the strongest balance sheet as both were currently in net cash position.

Kenanga said SLP owned the highest portion of export revenue, with 60% sales denominated in US dollar, against Thong Guan about 50% and Scientex at about 25%, while Daiboci owned about 30%.

And in terms of market value, Scientex by far owned the largest at RM2.9bil, followed by SLP at RM672mil, Daiboci at RM574mil and Thong Guan at RM439mil.

Kenanga gave an ‘outperform’ call on Scientex with higher target price of RM15.13, SLP with target price of RM3.11 and Thong Guan RM4.49, with top picks being Scientex and SLP on strong upsides from current levels.

“The sector is re-rating given the changes in demand for flexible packaging.

The longer-term prospects remain positive on continued capacity expansion and the Trans-Pacific Partnership Agreement,” said Kenanga.

Shares of Scientex closed down 10 sen at RM12.64 on Friday, while SLP was up 12 sen to close at RM2.90.

 

Source : thestar.com.my

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