PETALING JAYA: BP Plastics Holding Bhd is in good stead due to the robust demand from the domestic and export markets, strong balance sheet and better margin product mix.

       The company recorded stronger growth in sales volume in the first quarter of financial year 2021 (FY21), mainly driven by orders from existing customers in both export and local markets, said Kenanga Research, which has initiate coverage on the stock with an “outperform” rating and RM2.50 target price.

       BP Plastics, a key polyethylene (PE) film manufacturer in Asia which produces premium stretch film and customised packaging film, has a war-chest to expand its production capacity and ability to weather volatile resin costs, hence the ability to gain greater market share from smaller competitors.

       Being in a net cash position, it has allowed the company to pay generous dividend payouts, a plus point for the company compared to some of its peers.

       “We understand that BP Plastics is able to cater to extra orders from customers with its average utilisation rate of 75%, which is near 80%, upon which it will expand capacity to continue catering to the robust demand, ” the research house said.

       It has a budgeted capital expenditure of RM35.6mil for FY21/FY22 to finance the acquisition of its ninth cast stretch film machine, and expansion of blown film capacity.

       The ninth cast stretch film machine would help to increase the cast stretch film production by 10%, to a total capacity of 120, 000 tonnes per year, Kenanga said.

       It said BP Plastics has a long-term margin boost. Average selling prices (ASPs) would gradually fall and eventually normalise after resin prices stabilise to a lower level.

       However, Kenanga said the company has manufacturing specialities in premium stretch film and customised PE blown film based on customers’ requirements, thus, ASPs for these products tend to be sticky downwards.

       To expand its premium stretch film production capacity, it would acquire its ninth cast stretch film machine (begins production in FY22). Thus, it said the company would be able to better defend its elevated margin with a portfolio of higher margin products.