This article first appeared in The Edge Malaysia Weekly on May 13, 2024 - May 19, 2024

THE plastic packaging industry could be in for an earnings recovery this year, given that demand is expected to improve, as some buyers are starting to restock inventories again after a lull in 2023 when stock was kept at a minimum because economic conditions had weakened.

“We see buying taking place again now … I believe this year should be better than the previous year, although supply is still more than demand,” an industry player tells The Edge.

Having said that, the recovery is not a given just yet, as the macroeconomic environment remains uncertain on the back of higher-for-longer interest rates underscoring sticky inflation, along with geopolitical tensions that could ultimately affect business and consumer confidence, and hinder demand recovery.

Indeed, projections are mixed, with some industry players experiencing more buying activity now, while others remain cautious about demand. “Consumer demand seems flattish or to be experiencing just a low growth, in line with global economic growth projections,” another industry player says.

The recent earnings of SLP Resources Bhd (KL:SLP) — one of the first plastic packaging players to announce first-quarter earnings — appear to reflect the sentiment, as revenue for its first quarter ended March 31, 2024, amounted to RM40.79 million, little changed from a year ago at RM40.27 million.

However, net profit was higher by 60%, at RM4.93 million, compared with RM3.03 million in the same quarter last year, which was attributed to better a product mix and increased production output.

In a company report, PublicInvestment Research said the flexible plastic packaging industry continues to be weighed down by a global supply-demand imbalance.

Even so, there appears to be potential upside on the horizon.

“Despite the soft market sentiment, there are signs of gradual improvement in the operating environment, with demand recovery in 2024. Headline inflation is showing signs of cooling, while Malaysia’s exports are expected to improve in tandem with the bottoming-out of the semiconductor industry,” PublicInvestment Reseach says.

The plastic packaging industry is tied closely to global economic growth, given that packaging is used in almost all aspects of business, whether in trade, logistics or industries.

As such, when confidence in economic growth prospects is higher, the more businesses and consumers spend, leading to more robust plastic packaging sales.

“So, expectations of a pickup in the economy this year compared to last year augurs well for the industry,” observes an industry executive.

Kenanga Research has also upgraded the sector from “neutral” to “overweight”, as it sees local producers growing at a faster rate, after having gained market share from overseas peers on the back of lower energy costs and innovative products.

In an April 25 report, the research house says: “Local players have guided for a stronger flow of orders over the immediate term, driven by customers’ restocking activities ahead of price hikes stemming from rising resin prices and overwhelming response to their sustainable packaging materials. The upward momentum in sales should be sustained into 2HCY2024 on the recovery of manufacturing activities and consumer spending globally.”

An analyst covering the sector highlights that plastic packaging players, which derive a significant portion of revenue and earnings from overseas markets, have certainly benefited from the weaker ringgit.

“Even if we don’t take into consideration the forex (foreign exchange) differences, it is still largely cheaper for plastic packaging companies to produce locally compared to their overseas competitors, which are in developed markets such as the US and Europe,” he says.

He cautions, however, that investors need to be realistic about the earnings growth expectation of plastic packaging players, noting that it would not be realistic to expect the same exponential growth that occurred during the pandemic years of 2020 to 2022, when demand surged as people were made to stay at home and consumed more online.

By 2023, demand had tapered significantly, resulting in a contraction in revenue for most players in the industry.

“Demand will normalise. We can expect earnings growth to return to pre-Covid levels, which is around the high single digits,” says the analyst.

Fortunately, local players have upped their game by innovating and paying attention to market preferences on environment-friendly packaging.

“Nano stretch film and mono film are gaining traction, buoyed by the attention to sustainability in every step of the value chain. Nano stretch film is known for its thinner, yet stronger, properties, which enable customers to reduce film consumption without compromising on load stability; mono film is a fully recyclable film made up of a single type of plastic resin,” Kenanga Research says in its report.

It observes that SLP Resources has been expanding its customer portfolio for mono film, particularly in the Asean region, because of increasing preference for sustainable packaging.

The research house also highlights that local players have been actively seeking out new customers domestically and globally by offering innovative products and participating in international trade fairs to establish strategic partnerships and strengthen market presence.

“Some companies have strategically expanded their capacity in high-margin premium stretch film and blown-film products in recent years. Thong Guan [Industries Bhd (KL:TGUAN)], for instance, commissioned its ninth nano stretch film line in FY2023, whereas BP Plastic also introduced its ninth and 10th cast stretch film machines in December 2021 and December 2022 respectively. Note that these two machines mark BP Plastic’s initial foray into nano stretch film production,” it says.

“Such long-term capacity expansion should reposition the players favourably to further capitalise on the ongoing post-pandemic economic recovery, as their increased production flexibility and capabilities should translate into more orders.”

Around the time that Kenanga Research upgraded the sector, plastic packaging counters were enjoying a share price surge.

BP Plastics Holding Bhd’s (KL:BPPLAS) share price gained a total of 25% between April 19 and May 6, rising from RM1.28 to RM1.60.

Thong Guan rose 14% between April 16 and May 6, going from RM1.86 to RM2.12; and Scientex Bhd (KL:SCIENTX) rose 11.33% from April 19 to May 8, from RM3.97 to RM4.42.

Investors were slower to take to SLP Resources, as its share price increased 14.7% from 95 sen on April 26 to RM1.09 on May 3.

Some contend that the price movement in the industry was a result of the research house’s upbeat view of the sector, while others say it is in line with increased interest in the local stock market amid foreign fund inflow into the market. Moreover, local institutions continue to be net buyers.

In the first week of May, the benchmark FBM KLCI finally shook off much of the lethargy that had plagued it in recent years, breaching the 1,600 level for the first time in two years.

However, the more upbeat market effect does not seem to have made a lasting impact on the plastic packaging players,  as their share prices have lost steam, except for Scientex, which continues to make gains.

An analyst who covers the sector says Scientex’s bucking of the trend may be because it is not a pure plastic packaging manufacturer, as the company derives more than 30% of its revenue and close to 70% of segment profits from its property development division.

“Its property division has been performing well in recent quarters,” notes the analyst.

Scientex announced in its second quarter ended Jan 31, 2024, a revenue gain of 11.7% over the RM978.4 million recorded a year ago. Operating profit also increased by 29.7% year on year to RM191.3 million, from RM147.5 million. The company attributed the better performance to the property division.

As the 1Q earnings reporting season is only beginning, will plastic packaging companies start to see a turn in their earnings? 

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