Written by Loong Tse Min
Monday, 01 February 2010 22:57
KUALA LUMPUR: It is not difficult to see why the regional confectionery and beverage business may be one of the sectors expected to benefit from a recovery in the global economy this year.
Investment exposure to this sector can be obtained through packaging players located in Malaysia.
The Malaysian plastic flexible packaging (PFP) sector includes major players Daibochi Plastic and Packaging Industry Bhd and TOMYPAK HOLDINGS BHD [], MALAYSIA PACKAGING INDUSTRY [] Bhd and ADVANCED PACKAGING TECHNOLOGY [] [] (M) Bhd.
These four mid-cap listed companies together hold about 70% market share of the Malaysian PFP sector.
In a report last Thursday, CIMB Research compares the sector to the rubber glove making industry.
"We see many similarities between PFP and rubber glove producers. Both are in defensive resilient businesses and are able to pass on raw material cost rises to their customers.
"The players in both industries are also very competitive in the global and regional markets. Barriers to entry are high due to stringent industry regulations and requirements," the research house said.
Out of the four, Melaka-based Daibochi and Johor Bahru-based Tomypak supply 90% of multi-national corporation (MNCs) confectioners and beverage makers in the country and are deemed the best bet for overseas exposure.
CIMB Research estimated that MNC business contributes more than half or 65% of revenues for both companies. Local confectioners are also expanding their export markets. For example, about 30% of biscuit maker Cocoaland's revenue is currently derived from the Asian region outside Malaysia.
CIMB Research has outperform calls on both counters with a target price of RM4.50 for Daibochi based on 12 times calendar year 2011 (CY11) price-earnings (PER) ratio and RM4.55 for Tomypak on 8.4 times CY11 PE.
"Trading liquidity is poor for both stocks and market cap is small at US$28 million to US$64 million (RM96 million to RM156 million). However, this is offset by their strong potential share price upside and attractive dividend yields of 7% to 8%," said the research house.
Both Daibochi and Tomypak, responding to questions from The Edge Financial Daily, said the PFP industry in Malaysia was expected to do well this year.
In an email reply, Tomypak managing director Chow Yuen Liong said he expected industry demand for the first quarter to see a 15% year-on-year improvement. Going forward, the company plans to increase manufacturing capacity by as much as 15% this year aimed at developing its business in the domestic non-food sector.
"Barring unforeseen circumstances, we expect the performance to be better this year," Chow said.
In its reply, Daibochi said the improvement in demand would on average be a 5% to 10% growth from the lows of the financial crisis in late 2008 and early 2009. It pointed out that the food and beverage was a fairly defensive sector with demand resilient to short-term effects of economic crisis.
"Year-on-year, there is always growth in the food and beverage sector," Daibochi said.
In part, this year's better performance would be helped by better pricing mechanism for the products in the face of volatile petroleum-linked raw material costs. Tomypak's Chow said his company's contracts were on a "cost plus" basis to the selling price, which was revised every quarter. Cost plus means that the seller can pass on cost increases to the buyer who agrees to pay a margin over the cost price. Chow said this had been the practice for the last two years.
Daibochi said there was an improvement in the willingness of buyers to absorb cost increases.
"Major portions of business are on contracts where increases in raw material costs are passed on to the customers.
"The balance of customers are accustomed to cost increases from transportation, carriage, freight, utilities, carton packaging, commodities which form their main raw materials, etc. So these customers have become more receptive to price increases from flexible packaging suppliers," it said.
Both Daibochi and Tomypak have risen steadily, from levels of about 70 sen and 65 sen since mid-2009, respectively, to close at RM3 and RM2.63 last Friday.