Packaging manufacturers gain on resilient demand

The improved earnings are largely due to lower resin prices which translated into better profit margins for the counters, says analyst

By MARK RAO / Pic By MUHD AMIN NAHARUL

STRONGER earnings and robust demand have propelled local plastic packaging manufacturers to their strongest gains this year, despite lingering concerns over the US-China trade tensions.

An industry analyst for a local stockbroking company said buying interest for these counters has spread across the board, with their shares and earnings on an uptrend in recent months.

“The improved earnings are largely due to lower resin prices — the main raw material costs incurred by plastic packaging manufacturers which translated into better profit margins for these companies,” the analyst told The Malaysian Reserve (TMR).

“While some companies are facing challenges to grow their orderbook, we have seen leading manufacturers continuing to grow their revenue and top line.”

One such company is Scientex Bhd, the flexible plastic packaging manufacturer for the industrial and consumer industries, which registered its highest ever turnover of RM3.25 billion for the fiscal year ended July 31, 2019 (FY19).

This represented a 25% year-onyear (YoY) growth which was driven by better sales registered from the manufacturing business and the property division where the company is involved in the building of affordable homes in select markets.

The company’s net profit rose 17.3% YoY to RM333.7 million for the full-year period, largely owing to the sales mix, better product margins and improved plant utilisation recognised by the manufacturing division.

Year-to-date (YTD), the company’s share value has risen 2.5% and closed five sen higher at RM9.07 yesterday. This gave the company a market capitalisation of RM4.67 billion.

Scientex is also the largest shareholder in Daibochi Bhd after emerging with a 61.89% stake in the flexible packaging manufacturer and converter following a RM322.1 million deal completed in April this year.

Shares in Daibochi were up 21.6% YTD. The company’s manufacturing capabilities extend across the food and beverage, fast-moving consumer goods, pharmaceutical and industrial sectors.

In an exchange filing, Scientex said it consolidated its position in the flexible plastic packaging (FPP) converting segment through Daibochi.

This segment is expected to continue to grow in tandem with rising global demand, it said. Scientex also recently entered the US market after setting up a production facility in Phoenix, Arizona, to capture opportunities in the relatively untapped North American stretch film market.

It said it aims to enter more markets for the FPP and stretch film businesses. The group is cautiously optimistic that demand for its products will remain resilient, notwithstanding global risks and uncertainties.

But market peer Thong Guan Industries Bhd said the current global economic condition, especially amid protracted trade war conditions, has impacted the growth of the plastic packaging sector.

This has jeopardised both the company’s sales growth and the pace of its market expansion, it said in an exchange filing.

Nonetheless, the plastic packaging manufacturer registered a 56% YoY jump in net profit to RM26.7 million for the first half of 2019 (1H19) on higher exports for stretch films and the stronger US dollar-ringgit exchange.

Note that both Scientex and Thong Guan derive the bulk of their revenue from abroad.

Thong Guan, which is also involved in the tea and coffee business, saw its revenue growing 6.2% YoY to RM446.9 million for the halfyear period. Shares in the company were up 28.2% YTD, giving the company a market capitalisation of RM516.71 million.

The industry analyst, who spoke to TMR, said there were concerns that the ongoing trade rift between Washington and Beijing would dampen activity in the US — a key market for many of these plastic packaging manufacturers.

However, trade war conditions have yet to adversely impact demand for plastic packaging manufacturing.

“I believe these manufacturers should end the year strongly due to the positive industry outlook,” the analyst said.

Other companies that have also seen strong gains this year are SCGM Bhd, which rose 10.2% YTD, and Master-Pack Group Bhd, whose shares noted a substantial 169% YTD gain.

While SCGM is involved in plastic packaging manufacturing, Master-Pack is predominantly in the paper packaging business, namely the designing and manufacturing of corrugated paper cartons.

The latter more than doubled its net profit in 1H19 to RM6.58 million from the RM2.69 million managed in the corresponding period last year, while revenue increased 47.2% to RM98.08 million over the same period.

This was owing to higher deliveries of new products, the drop in raw material prices and improved cost efficiency recognised by the company over the half-year period.