Rising demand for plastic packaging products
KUALA LUMPUR: CGS-CIMB Research has upgraded the packaging sector to “overweight” from “neutral” due to the rising demand for plastic packaging products, driven by stay-at-home orders.
The research house predicts the packaging sector’s core net profit to be 12.5%, and compounded annual growth rate to be 8.7% for calender year 2020 to 2022, driven by upcoming capacity expansions.
“The packaging companies’ pivot towards high-margin products will help the bottom line accelerate further than their turnovers. Malaysia’s packaging sector is striding along well in this Covid-19-induced recession, ” it said.
CGS-CIMB Research noted that the sector’s revenue for the first nine months of this year grew by 11% year-on-year (y-o-y), while core net profit jumped 42.9% y-o-y.
“The sector’s sales growth was driven by global fast-moving consumer goods (FMCG) clients, who see value and quality in Malaysian-made packaging products, ” it said.
The research house pointed out that the packaging companies under its coverage are looking beyond Malaysia to fulfil their growing appetites.
“With opportunities abound for packaging companies, we believe an expansion drive would be necessary to cater to the rapidly growing demand, ” CGS-CIMB Research said.
Packaging player Daibochi Bhd is creating new lines of packaging products for its FMCG clients globally, which increases more packaging contracts for markets outside Malaysia.
Other players such as Tomypak Holdings Bhd has been marketing its products to overseas markets, with exports value more than double compared with its local sales for the nine-month period of 2020.
Besides that, Thong Guan Industries Bhd’s foray into the messenger bag segment turned to the black in just one year, as production was snapped up by US e-commerce giants.
CGS-CIMB Research said Thong Guan Industries is its sector’s top pick. “Our add call for the stock comes with a target price of RM3.61, ” it said.
Daibochi is also its favourite for this expansion angle. Its target price of RM4.04 pegs it to 18.6 times price-to-earnings ratio for calendar year 2022, in line with its 5-year average multiple. “Their growth spurts should justify a higher valuation, in our view.”
It added that Tomypak’s rally earlier this year leaved little upside to its target price, hence the “hold” call.
“Downside risks for the sector include rising raw material prices and the ringgit’s depreciation against the US dollar, ” it added.