KUALA LUMPUR (July 15): Kenanga Research expects a turnaround in the plastic packaging sector this year due to elevated oil prices arising from Middle East conflicts since February 2026, which have resulted in resin prices rising by about 80% or more on average.
Historically, higher resin prices would translate into better operating profit for the plastic packaging sector given a cost-plus business model, the house said.
Kenanga is forecasting Brent oil to average at US$80 (RM325) per barrel in 2026 and US$74 in 2027, with the view that oil prices are unlikely to fall its pre-conflict levels even if the Middle East situation de-escalates.
Since its previous sector report, concerns on supply shortages have emerged that had not only stoked increased orders from existing customers, but some of the plastic packaging producers have also started to receive enquiries from new customers given "force majeure" from their existing suppliers.
"Players could thus gain market share," Kenanga said in a note on Wednesday.
Typically, the house said, there will be about one to two months' time lag between purchase orders and revenue recognition upon orders delivery.
Hence, the inventory gains and the potential margin expansions from higher average selling prices will mostly be reflected in the upcoming second-quarter results.
"Many plastic packaging players are estimated to have between two and three months of inventories, so the sector may likely enjoy higher profits for a quarter or two from inventories bought at a cheaper level but sold at higher cost-plus prices currently, and order volumes should also be good as customers rush to buy in the anticipation of further price increase."
The research house gathered that the plastic packaging players under its coverage did not face any major supply interruptions, thanks to well-diversified sources across the US, Asia and Middle East, supported by long-standing relationships and a healthy cash position.
The ringgit has marginally weakened from an average of 3.97 against the US dollar in the first quarter of 2026 to an average of 4.00 in 2Q2026, and as this is broadly in line with Kenanga's 2026 forecast of 3.95, the impact on the forecast is more contained.
As its sensitivity analysis suggests that a one-percentage-point rise in resin prices should improve the plastic packaging sector's profitability by an estimated 0.3%, the firm is valuing the companies based on their 2027 normalised earnings on a base-case assumption of US$74 per barrel of Brent oil on a blended basis for 2027.
Kenanga kept its 'overweight' call on the sector. Its top picks for the quarter remain Thong Guan Industries Bhd (KL:TGUAN) with an 'outperform' call and a target price of RM1.73, and BP Plastics Holding Bhd (KL:BPPLAS) with an 'outperform' rating and target price of 87 sen.
The research firm likes Thong Guan given its growth momentum in the food and beverage segment, and its aggressive push into overseas markets with environmentally friendly, high-performing products.
At the current valuation, Thong Guan is trading at a discount of close to 20% to its 10-year historical forward price-earnings ratio of about nine times.
Meanwhile, Kenanga likes BP Plastics for its success in securing several reputable bread brands in Malaysia as clients, and its ability to pass through higher resin costs underpinned by its quality stretch films centric business model.
The firm also downgraded Scientex Bhd (KL:SCIENTX) from 'outperform' to 'market perform' following share price action.
The headwinds flagged earlier for the sector remained, including disruptions from global trade tensions and heightened competition from overcapacity.
However, Kenanga believes that the impact of trade tensions have been largely reflected in 2025 numbers.