Europe’s benchmark Dutch Title Transfer Facility gas futures price has come off by >80% from the recent peak of above EUR300/megawatt-hour to below EUR40/megawatt-hour thanks to a mild winter in Europe.
Nonetheless, Malaysian producers may be able to draw some comfort from consensus that is still pointing to Dutch Title Transfer Facility gas futures price to average at EUR50-60/megawatt-hour in calendar year 2023.
On the other hand, Malaysian producers have to contend with rising energy costs following a hike in electricity tariff in Jan 2023.
“We maintain neutral on the export-dependent sector that will not be spared the global economic slowdown over the immediate term,” said Kenanga Investment Bank Bhd (Kenanga) in the recent Sector Update Report.
Kenanga also sees European manufacturers gradually making a comeback in a more significant way on the heels of the sharp drop in their gas prices, giving Malaysian manufacturers a run for their money.
“We believe this is manageable as typically electricity only makes up 4%-6% of total production cost of plastic packaging players,” said Kenanga.
Also helping, is the Green Electricity Tariff programme of TENAGA (market perform; trading price: RM9.64) that offers an exemption to imbalance cost pass-through surcharge of 20.0 sen/kilowatt-hour via a subscription charge of 3.7 sen/kilowatt-hour (resulting in an effective savings of 16.3 sen/kilowatt-hour).
However, this offer to buy renewable energy is capped at 30% of total electricity consumption, subject to the availability of quota and only valid for six months ending 31 Jun 2023 for now.
“We understand that TGUAN, BPPLAS (market perform; trading price: RM1.23) and SCIENTX (underperform; trading price: RM2.99) have signed up for the programme,” said Kenanga.
Meanwhile, weaker sales volumes due to the global economic slowdown as well as the return of European manufacturers could be partially mitigated by the on-going positioning by players towards higher-margin products such as premium stretch films and premium blown film packaging. Also helping, are softening cost of input resin as well as the easing in labour shortage that should boost productivity and efficiency.
Meanwhile, over the longer-term, market researcher Mordor Intelligence projects the global plastic packaging market to grow at a compounded annual growth rate of 3.5% in 2022-2027. Kenanga believes local players could grow at a faster pace during the period as they gain market shares from overseas manufacturers that are losing competitiveness due to the rising production cost.
Plastic packaging players under their coverage have put in place fairly aggressive expansion plans to take advantage of the situation. Kenanga sector top pick is TGUAN.
They like the company for its earnings stability underpinned by a more diversified product portfolio, 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.
Adding to these is TGUAN’s product innovation via research and development and collaboration with the likes of ExxonMobil to create more environmentally-friendly products.
