This article first appeared in Capital, The Edge Malaysia Weekly on November 1, 2021 - November 7, 2021

AFTER the lockdowns from May to September to contain the spread of Covid-19, corrugated carton players are anticipating a slow and steady recovery in operations.

Only three companies — Muda Holdings Bhd, Public Packages Holdings Bhd and Master-Pack Group Bhd — registered improved results for the first half of the year ended June. A quick check of the listed players shows that many faced temporary plant shutdowns during the lockdowns or had customers that were impacted by the containment measures.

With the exception of Muda — the only integrated player with a successful corrugated carton plant business as well as a paper mill — the others have not been on the radar of investors. Nor have they received much press and research coverage compared with their plastic packaging counterparts.

“Corrugated cartons are simple products with minimal differentiation, while plastic packaging is more diverse with differentiation in materials, design, printing and technology. [Therefore] a good and well-managed plastic packaging company [would] seem to have better growth prospects and profit margins,” says TA Investment Management’s chief investment officer Choo Swee Kee.

Still, with e-commerce activities having gained a stronger foothold during the lockdowns as more choose to shop online, demand for corrugated cartons is expected to be boosted.

“Indeed, Malaysia is the region’s e-shopping capital. A survey by Facebook and Bain & Co revealed that 22 million consumers in Malaysia are digital consumers and online channels are four times larger than offline channels,” says private investor and former investment banker Ian Yoong Kah Yin.

Here, we take a look at the performance of the three aforementioned corrugated carton players that have reported an improvement in their financials.

Muda currently operates two paper mills — in Penang and in Kajang, Selangor — as well as seven corrugated plants across Selangor, Penang, Melaka, Perak and Johor.

Prior to May, business was actually booming for Muda, says its managing director Datuk Wira Lim Chiun Cheong, thanks to the increase in demand from customers, particularly glove manufacturers, furniture players and the electrical and electronics industry.

However, things took a turn for the worse after that following the imposition of the Movement Control Order, which impacted not only Muda’s plants but also those of its customers as they experienced temporary shutdowns in operations.

Then, the cost of goods sold climbed as raw material prices rose.

Lim explains that Muda’s paper mills were impacted by the increase in the price of imported waste paper or old corrugated cartons (OCC).

“In March, OCC was about US$240 per tonne, and then in September, it shot up to about US$300 per tonne. Similarly, local OCC prices were about RM850 per tonne in March and are now about RM1,000 per tonne.”

Muda’s paper mills currently use 70% local OCC while the remaining 30% is imported from suppliers in Europe, Thailand and Singapore.

About 40% of the two types of papers produced at its paper mills, corrugating medium and test liners, are supplied to Muda’s corrugating plants while the remaining 60% are sold to third parties. However, due to the lockdowns which impacted demand from its customers, Muda was unable to pass on the increase in prices to its customers.

“From September last year up to March, we increased the selling price of our corrugating medium and test liners by RM550 to RM600 per tonne due to the increase in OCC prices, but our carton plants only managed to increase their selling price by RM400 per tonne.

“Then, from the second half of the year onwards, we could not increase the price of our products at our carton plants because of the lockdowns and the weakening demand. However, in October, most of the industries are already in full production, so we will be increasing the prices of our corrugated sheet boards by RM100 to RM150 per tonne,” he says.

For the first half of the financial year ended June 30, 2021, Muda’s net profit more than doubled to RM59.77 million on the back of a 33% year-on-year increase in revenue to RM814.78 million. This was achieved on the back of higher selling prices for industrial paper and packaging products, coupled with better demand for packaging products.

The company is in a net debt position as at June, with a cash balance of RM91.51 million and borrowings amounting to RM604.43 million. Nevertheless, it has been consistently paying dividends, with a trailing 12-month gross indicated dividend yield of 1.8%.

Compared to a year ago, Muda’s share price has increased by 72% to RM2.76 last Tuesday, valuing the company at RM841.9 million.

Yoong says Muda has a strong advantage over its competitors because of the deep horizontal and vertical integration across its product lines.

“The majority of the listed companies in this sector lack the scale of operations and integration that Muda enjoys, as the company has its own paper mill.

“Muda is also compelling at its current price. It is trading at trailing 12-month price-earnings of [6.9] times, with earnings expected to increase by 12%-15% over the next two years,” he says.

Lim and parties affiliated with him control some 41.9% of Muda’s shares, while Penang-based stationery manufacturer Asia File Corp Bhd has a 23% stake in the company.

Penang-based Public Packages has seven manufacturing plants located across Penang, Kedah and Selangor. Apart from its carton manufacturing business, it also operates Prestige Hotel in Penang.

For 1HFY2021, Public Packages reported a 47% year-on-year increase in net profit to RM8.46 million, while revenue grew by 8% to RM92.62 million on improved demand for its products.

Compared to a year ago, its share price increased by 29% to 81.5 sen last Tuesday, valuing the company at RM153.78 million. The stock is currently trading at a trailing 12-month price-earnings of 5.1 times.

As at June, Public Packages was in a comfortable net cash position with a cash balance of RM84.99 million and borrowings of RM24.99 million. However, it has been cautious with dividend payments, as its trailing 12-month gross indicated dividend yield stood at 0.3%.

Public Packages executive chairman Koay Chiew Poh is its largest shareholder with a 44.69% stake.

Also based in Penang, Master-Pack posted a 59% increase in net profit for 1HFY2021 to RM7.56 million, thanks to improved deliveries to customers and better margins. Revenue for the period, however, slipped by 1% to RM73.5 million as deliveries to a major customer were discontinued during that period. Compared to a year ago, Master-Pack shares have increased by 9% to RM1.80 last Tuesday, valuing the company at RM98.3 million. Its current price-earnings (TTM, or trailing 12 months) ratio is 6.98 times.

Yoong, who holds Master-Pack shares, says the company is a well-managed, small-cap manufacturer of corrugated cartons with operations in Penang and Vietnam.

“Master-Pack offers exposure to the renewable energy sector. The thriving solar equipment manufacturing sector contributed 54% of revenue in FY2020. Interestingly, its major shareholder is Yayasan Bumiputra Pulau Pinang with a 29% stake,” he says.

As at June, Master-Pack was in a net cash position, with a cash balance of RM37.1 million and borrowings of RM6.43 million. The stock has an indicated gross dividend yield of 1.1%.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.