Following a recent meeting with management, we remain cautious on the Group’s outlook. Management expects earnings to remain depressed due to its key export markets, particularly Japan, facing extended periods of low growth. This is in addition to the weakening of the Yen, and higher inflation undermining consumer sentiment and eroding households’ purchasing power. Besides that, average selling prices (ASP) continue to face downward pressure amid intense competition and lower resin cost. We cut our FY23-24F earnings forecast by 20% to reflect lower demand, weaker ASP and lower margin. Following our earnings adjustment, our TP is lowered to RM0.73. Our revised TP suggests a downside of 21% therefore we downgrade our call from Neutral to Underperform.

• 1QFY23 result round-up. During the quarter, net profit fell by 33.9% YoY to RM3.0m, attributed to lower revenue (-11.5% YoY) and higher operating cost arising from higher utility and labour expenses. Net profit margin fell YoY to 7.5% from 10.1%, though improving QoQ from 4.9% on better product mix and favorable foreign exchange during the quarter.

• Slowdown in Japan. Japan is facing weaker than expected consumption due to elevated inflation and the global economic slowdown. The weakening Yen exacerbates inflationary pressures by raising the cost of imported goods for consumers and businesses. The prolonged currency depreciation and higher inflation prompts consumers and businesses to cut spending, dimming the outlook for the Group’s exports.

• Outlook for the flexible plastic packaging industry remains challenging. While material and logistic costs ease, over-supply situations and weak external demand remains due to the slowing global economy and the market lacking catalysts to spur demand growth. On a positive note, labor shortage issues are abating while the Group’s premium flexible packaging products for the circular economy is gaining traction. Nevertheless, contribution from this new product to its bottom line remains negligible at this juncture.

Source: PublicInvest Research - 12 Jun 2023