Packaging firms doing well, US rates in focus

Monday, Dec 28, 2015

The first quarter core net profit of RM64.3mil for Scientex smashed expectations, with the company’s manufacturing division registering a 158.5% jump in year-on-year (y-o-y) earnings before interest and tax (EBIT), driven by a 5.1 percentage points margin expansion to 9.7%.

UOB Kay Hian remains upbeat on the company’s ongoing transformation into a regional consumer packaging player and has put a higher target price of RM12.50 from RM10.20 for the stock, implying a 9.2 times price earnings ratio (PE) for financial year 2017.

Although sales for first quarter financial year (FY) 2016 grew 22.4% y-o-y, significant margin expansion was achieved on the back of higher consumer packaging sales mix (which yielded better margins than that for industrial packaging); a stronger US dollar against the ringgit and operating efficiency as well as economies of scale.

More excitement is in store for the manufacturing division as the first batch of its cast polypropylene production lines are expected to begin commercial production by the end of 2015, while the commercial run for the new bi-oriented polypropylene lines are targeted to kick off in the middle of 2016.

Meanwhile, the recently-acquired Scientex Great Wall Ipoh Sdn Bhd (formerly known as Mondi Ipoh Sdn Bhd) is slated for a 50% expansion in the second half of 2016.

“We expect to see significant contribution from these additional capacities in FY 2017,’’ said UOB Kay Hian.

Demand for Scientex’s properties should remains resilient due to its focus on building affordable properties.

In the first quarter of FY2016, Scientex launched six new projects in Pasir Gudang, Kulai, Senai and Malacca.

The strong take-up of its recent launches, estimated at 80%-90%, has pushed unbilled sales to RM632.2mil to be recognised over the next two to three years compared with RM584.9mil as at end-July 20 15, according to UOB Kay Hian.

Scientex had recorded a RM27.2mil forex loss in FY2015 from paring down its US dollar-denominated loans.

The company recorded a much lower forex loss of RM3.5mil in first quarter FY2016; its US dollar-denominated loans stood at RM9.7mil (3% of total borrowings) as at end of October 2015.

In view of the stronger-than-expected earnings, UOB Kay Hian has raised its earnings forecasts by 30%-37% for FY2016-2018 after updating its sales and margin assumptions.

The higher target price for the stock assumes a 12 times PE for 2017 for the manufacturing segment and a lower six times PE (from eight times) 2017 for the property segment to take into account the industry-wide slowdown in property currently.

Meanwhile, in 2016, the US Federal Reserve will pay at least US$12.2bil to US and foreign banks to keep the money created via its quantitative easing programmes out of the economy. If the Fed raises rates as expected next year, the amount nearly doubles to US$23.1bil, said Yahoo Finance.

From 2008 to 2015, the Fed purchased over US$4 trillion worth of bonds to stimulate growth in the economy.

To sterilise the vast sums of money that would otherwise circulate throughout the economy and cause price inflation, the Fed pays an above-market interest rate of 0.5% to banks on reserves, or digital cash, held at the Fed.

Currently, banks are holding US$2.5 trillion at the Fed and are paid US$34.5mil per day in interest, according to Yahoo Finance.

Assuming the Fed raises rates four times, payments to banks at the end of 2016 would amount to US$103mil per day.

In addition to paying interest on reserves, the Fed conducts daily auctions to drain cash from the economy and maintains a floor on short-term interest rates.

These reverse repo operations pay 0.25% and have averaged US$154bil per day since the Fed raised rates on Dec 16.

The interest paid by the Fed to banks and funds that participate in the operations amounts to US$1.06mil per day.

If the Fed raises rates as expected in 2016, total payments would be US$1.03bil in 2016, which is in addition to the US$23.1bil paid as interest on reserves, Yahoo Finance reports.

As 2015 draws to a close next week, the fortunes of the last few trading days of the year on Wall Street may be dictated by the direction of the financial sector.

The financials on Wall Street have risen more than 6% this quarter, with investors expecting the sector to be one of the main beneficiaries of the first interest rate hike by the Fed in nearly a decade, according to a Reuters report.

However, the potential exposure of banks to the energy-dominated US high-yield corporate bond markets has unnerved investors, and caused financial and energy shares to stall during the two trading sessions that followed the hike.

Stocks in both those sectors have been closely correlated in recent weeks.

Should oil prices fail to stabilise and energy shares continue to fall, that could be reflected in the financials, said Reuters.

In Hong Kong, the downward trend in its housing sector will last for two to three years, with the market pressured by rising mortgage costs and an increasing supply of new homes.

“In the short term, home prices will drop within 5% in the first half of 2016.

“Some owners of small flats who are not financially strong will cut prices to offload assets amid the unfavourable environment,” Thomas Lam, head of valuation and consultancy at Knight Frank, was quoted as saying by the South China Morning Post (SCMP).

The Hong Kong Monetary Authority (HKMA) has matched the rise in US rates, increasing its own base rate by 25 basis points, bringing its base rate to 0.75%.

The base rate is the discount window rate charged to commercial banks to get funding from the HKMA.

There is growing evidence that buyers are less confident of the price outlook.

One new home buyer, who had recently signed a purchase agreement for a 1,240 sq ft flat at Homantin Hillside for HK$27.28mil, walked away from the deal, forfeiting a HK$1.36mil downpayment, said SCMP, quoting the agent.

Columnist Yap Leng Kuen reckons year-end window dressing activities will be there while stocks with long term potential will be the steady performers.

Other News