KUALA LUMPUR: The plastics and packaging sector is expected to see better earnings across the board in the fourth quarter (Q4) of 2021 compared with the third quarter.

       This will be achieved on the back of normalisation of operations with 100% workforce capacity, elevated average selling prices (ASPs) and resilient demand.

       In a report, Kenanga Research estimated that plastic players operated at a utilisation rate of 65% to 75% in Q4, versus 55% to 60% in Q3.

       Also, plastic players like Thong Guan Industries Bhd, BP Plastics Holding Bhd and SLP Resources Bhd have guided for stronger demand from their Japanese customers due to power disruptions in China, which diverted orders to Malaysia.

       Some of the plastic players have orders up to the first quarter of 2022.

       “Plastic players have increased their ASPs in tandem with the surge in resin prices since July 2021 due to the global freight issue and electricity crisis in China,” said Kenanga Research, which maintained its “neutral” call on the sector.

       It noted that the upside potential from better product mix is negated by the downside risk of global freight issue and labour shortages.

       Kenanga Research remained bullish on Thong Guan with an “outperform” call and target price of RM3.68 on resilient demand and long-term capacity expansion, especially for its premium products.

       For BP Plastics, the research unit maintained its “outperform” call with a target price of RM2.22, based on a financial year ending Dec 31, 2022 (FY22) estimated earnings per share of 18.8 sen and an unchanged ascribed price-earnings ratio of 11.8 times, post accounting for the bonus issue and full conversion of warrants.

       For BP Plastics, the research unit maintained its “outperform” call with a target price of RM2.22,

       Kenanga Research pointed out that beginning July 2021, there was a reversal of trend after prices broke out through the lower boundary in June 2021.

       Resin prices have continued to rise by 7% to 15% across the board compared with 2% to 10% as projected in the research unit’s earlier report.

       However, Kenanga Research’s channel checks suggest that the significant increase in resin prices will not hurt plastic players’ margins due to the cost-plus mechanism.

       Logistic disruptions and the electricity crisis in China were the main reasons driving resin prices sharply higher for the period.

       Moving forward, despite continued global logistic disruption, Kenanga Research expects resin prices to soften and gradually stabilise in the second quarter of 2022, as new resin capacity should come onstream from the petrochemical players.

       For 2022, the research unit continues to maintain its resin price assumption of US$1,100 (RM4,594.70) to US$1,200 (RM5,012.40) per tonne, marginally below the year-to-date average of US$1,100 (RM4,594.70) to US$1,500 (RM6,265.50) per tonne.

       As resin prices rose significantly, plastic players have adjusted their ASPs across products, passing through the higher cost to customers.

       Kenanga Research, thus, expects an increase in ASPs, which will allow plastic players to sustain their margins.

       “Notably, premium products will continue to hold on at elevated ASPs while ASPs for commoditised products will mirror the resin price fluctuations,” it said.