Plastics players to see earnings upturn in 4Q
KUALA LUMPUR: Moving past expectations of a soft earnings quarter in 3Q21, the plastics and packaging sector can look forward to improved operating conditions given the easing lockdowns and stable resin prices.
In a note, Kenanga Research said plastic players have returned to full workforce strength as the National Immunisation Programme continued to improve worker vaccination rates in the industry.
It added that certain plastics firms under its coverage, incuding BP Plastics, Thong Guan Industries and SLP Resources, should see a boost in local sales following the easing lockdowns.
"Thus, we believe that in 4QCY21, the plastic players will ramp up their utilization rates from an average of 65% to 75%," said the research house.
Moreover, Kenanga maintained that demand for SCGM's F&B packaging and PPE products will remain resilient, driven by continued customer preference for takeaway and ready-to-eat meals packaging, heightened hygiene awareness, new packaging products for overseas markets and continued usage of face masks in the near future.
Meanwhile, the marginal increase of 2% to 10% in resin costs since July is not expected to have a big impact on plastic players' margins.
"Based on our channel checks, we gathered that this marginal increase in resin costs is insignificant for the plastic players relative to the high resin prices in March this year, as they are well positioned to absorb the marginally higher costs without hurting their margins," said Kenanga.
The research house expects resin prices to continue trending downwards and gradually stabilise as petrochemical producers gradually rebuild their resin inventory after the February deep freeze.
Kenanga maintained its FY21 resin price assumption of US$1,100 to US$1,200 per metric tonne, marginally below the year-to-date average of US$1,00 to US$1,400 per metric tonne.
It noted that average selling prices (ASP) of plastic players' products have been stable given the marginal increase in resin prices in July.
ASPs are expected to continue softening due to the long-term downtrend of resin prices, but at a slower pace than resin prices given the robust demand for plastic players' products.
Moving forward, Kenanga expects softer earnings across the board for 3Q21 due to the strict lockdown from June to September this year and the limited workforce capacity.
However, given that SCGM and Scientex have just release their results, Kenanga expects the next set of report cards to be announced in mid-December to show earnings improvement.
The research house maintained its "neutral" call on the sector with Thong Guan, SCGM, BP Plastics and SLP as its sector picks.