SLP Resources Berhad (SLP) reported lower net profit of RM3.0m in 1QFY23 (- 33.9% YoY) mainly due to lower revenue (-11.5% YoY) and higher operating cost. Results were below consensus and our expectations, accounting for 13.8% and 14.4% of full-year estimates respectively. Earnings discrepancies were mainly attributed to weakening demand from oversea markets and escalating operating cost. We keep our estimates unchanged however, on expectations of stronger quarters ahead underpinned by gradual improvement of external demands, especially from Japan, Australia and New Zealand and anticipate a better business operating environment towards the 2nd half of FY2023 following China’s reopening. We maintain our Neutral call with unchanged PE based TP of RM0.96. On a side note, SLP declared a first interim dividend of 1.0 sen (FY22: 1.0sen).

• 1QFY23 revenue fell by 11.5% YoY to RM40.3m, attributed to weakening demand from oversea markets (-31.1% YoY), however this was somewhat offset by marginally higher demand from domestic market (+3.6% YoY).

• 1QFY23 net profit decreased considerably by 33.9% YoY to RM3.0m as a result of lower revenue and higher operating cost. Elevated operating cost arising from higher utility and labour cost resulted by upward adjustment in the electricity tariff via Cost Pass-Through (ICPT) mechanism and the adoption of the new Employment (Amendment) Act 2022 may have an adverse impact on the Group performance throughout the year 2023. Net profit margin fell YoY to 7.5% from 10.1% nevertheless it has improved QoQ from 4.9% due to better product mix and favorable foreign exchange during the quarter.

• Outlook for the flexible plastic packaging remains challenging. While material and logistic cost ease, over-supply situations and weak external demand remains due to slowing global economy and the market lacks catalyst to spur the demand growth. On the positive note, labour shortage issue is abating and the Group’s premium flexible packaging products for the Circular Economy is gaining traction. Along with the Group’s continuous invest and transform its production processes with more automation and digitalization, we expect to see improvement in production and plant utilisation rate. With China’s reopening recently, supply-demand situation is expected to improve further. Thus, we anticipate a better business operating environment towards the end of 2023.

Source: PublicInvest Research - 8 May 2023