This article first appeared in Capital, The Edge Malaysia Weekly on September 25, 2023 - October 1, 2023

Neutral

Kenanga Research (Sept 18): The earnings delivery (against our expectations) by the sector in the recently-concluded 2Q23 results season was less disappointing versus the preceding quarter, with 50%/50% coming in within/below our forecasts versus 25%/75% coming in within/below in the preceding quarter.

Generally, players’ top lines contracted due to weaker sales volume amid a global economic slowdown and lower average selling prices, in tandem with falling resin prices, which are the main input costs.

The demand for plastic packaging remained subdued as there was no significant pickup in demand despite China reopening its economy early this year. We note that China plays a significant role in the global plastics industry as it is the world’s largest producer and consumer of plastic products.

The industry continued to feel the impact of rising operating costs in 2Q23, notably from higher labour and utility costs. However, it managed to maintain margins quarter on quarter, thanks to a better product mix as well as tighter cost control. There was a bright spot in higher-margin products, particularly the thinner types, as they are more environmentally friendly.

We see a slight pickup in demand in 2H23 as buyers rush to stock up ahead of price hikes driven by higher resin prices. Resin prices have inched up by about 5% since July. However, we foresee the utilisation rate to stay range bound and lacklustre, at between 50% and 65% across the board in 2H23.

We expect BP Plastics Holdings Bhd, Scientex Bhd and Thong Guan Industries Bhd to face higher electricity costs in 2H23 as they opt out of the Green Energy Electricity (GET) programme due to the higher GET rate of 21.8 sen/kWh (from 3.7 sen/kWh), compared to the conventional Imbalance Cost Pass-Through (ICPT) surcharge of 17.0 sen/kWh. We believe the higher cost of electricity will be cushioned by better orders in 2H23.

Our top pick for the sector is Thong Guan. We continue to like the company for: (1) its earnings stability underpinned by a more diversified product portfolio; (2) its earnings growth prospects underpinned by expansion in production capacity for premium products such as nano stretch films and courier bags, and a deeper penetration into the Europe and US markets as well as (3) its product innovation via research and development and collaboration.

Target price: RM2.43 BUY

RHB Research (Sept 18): YTL Power International Bhd (YTLP), in our view, could be one of the Johor thematic ideas arising from its future development of data centres and solar assets in Kulai. We expect more data centre deals upon the successful delivery of the Phase 1 project and the expedition of solar assets riding on the implementation of the National Energy Transition Roadmap (NETR).

Recall SIPP Power, a 70%-owned subsidiary of YTLP, acquired 664ha of oil palm estates for RM429 million from Boustead Plantations in 2021 with the intention to develop large-scale solar plants. A portion of the land (about 275 acres) is being carved out to develop a 500MW Green Data Centre Park with a total investment value of RM15 billion. The data centres are owned separately by YTL DC, a wholly owned subsidiary of YTLP.

For now, we value data centre investments in our target price at 13 sen per share on the progressive development of 300MW over the next decade with the assumptions of RM30 million/MW capex, 11% internal rate of return, 7.5% weighted average cost of capital and 14-year firm contract.

Target price: RM5.18 ADD

CGS-CIMB Research (Sept 18): The CelcomDigi network integration appears to be progressing with minimal issues and there is no evidence of major disruptions, judging from our checks on online telco blogs. As per CelcomDigi Bhd’s disclosures in mid-August, integration work for about 40% of the 5,000 sites targeted in 2023 has been completed. The integration process will see the pre-merger combined total of 25,000 sites for the two networks streamlined to about 18,000 sites, with network capacity and coverage improved post-integration, according to the company.

We see improved earnings (FY22-25F EPS CAGR of 24.4%) as the key rerating catalyst, with finalisation of the 5G network structure removing a large shroud over the overall sector.

The integration is progressing with merger costs tracking below our earlier estimates. Hence, we lift our FY23/24/25 Ebitda by 4.1%/2.9%/3.1%. We believe profits will double over FY23-25.

Our discussions with industry players suggest that progress is being made on 5G negotiations but finality could still be months away. Our view remains that Celcom and Maxis will be the key drivers of the eventual two networks, with Celcom most likely to operate the first network (Entity A), which is currently the DNB network.

Target price: RM1.00 NEUTRAL

PublicInvest Research (Sept 19): The group is undergoing an accelerated transformation plan to focus on its core business (energy and bioenergy) and divest its non-core physical assets and businesses by end-2023.

Despite its strong position as a global leader in pipe coating, the group plans to elevate its services to capture more opportunities in clean energy projects. The transformation plan will be instrumental in maintaining its leadership while embracing the future energy landscape with more efficient capital and resource allocation. While we are positive on its plans, we keep our neutral call and unchanged target price of RM1, pending materialisation on its execution.

Backed by an all-time high order book of RM3.9 billion, most of its core facilities are reaching full utilisation rates and achieving economies of scale.

The group also plans to upskill its Malaysian fabrication yard staff by mobilising its experts from the Batam yard to Teluk Panglima Garang and Kuantan for knowledge transfer. This will reduce the bottleneck at the Batam yard as it is reaching full utilisation rate.

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.