We initiate coverage on SLP with a BUY recommendation and TP of RM0.97 based on 14.5x P/E on FY23f EPS of 6.7sen. We favour the group’s strategy in developing more high-value added product which will result in margin expansion. Besides, we deemed the growing importance of “design for recycling” – which is expected to result in higher MDOPE sales to be a major catalyst in driving SLP’s earnings in the future. We forecast SLP’s FY21-24f PAT to grow at a CAGR of 12.6%. We deem SLP a good divvy name in current macroeconomic conditions considering its uninterrupted dividend track record.

A prominent blown film manufacturer. Established in 1989, SLP is a niche plastic packaging solution provider with more than 1,000 plastic packaging products for numerous applications in the F&B, industrial, personal care, home care and healthcare sectors. Geographically, the domestic market (Malaysia) remains SLP’s top revenue generator (c.57.5% in FY21), while Japan (34.2%) and Australia (4.6%) are the group’s leading export destinations.

Global environmental pressures an opportunity for Southeast Asian (SEA) players. With EU and China (two major plastic-producing regions) imposing strict laws and regulations to control plastic pollution, the regions’ plastic players have lost its competitive cost advantage, deterring them to expand its capacity domestically. With that, SEA players (which are in relatively looser scrutiny environment) are currently positioned at a sweet spot to capture the market share. In addition, Japan's ongoing order diversification from China to SEA is expected to be expedited following uncertainty from its “zero-Covid-19” policy.

To ride on the growing importance of “design for recycling”. Although most plastic packages are recyclable nowadays, the use of composite material that consist of different materials in a single package has made recycling so costly that most composite packages end up in landfills. As such, “design for recycling” has become a key focus in minimizing single-use plastic waste with solutions to replace these substrates with PE films. Oriented PE that includes mono-oriented polyethylene (MDOPE) – a film that SLP is producing now – is therefore designed in recent years to solve this problem. We believe that the huge market potential of MDOPE on the back of booming demand for “design for recycling” will be a major catalyst to drive SLP’s earnings growth going forward.

Tapping into more lucrative segments. Being a niche plastic player that focuses on developing value-added products, we note that SLP has lucrative higher margins (GP: 21.8%) in comparison to its pure-play plastic producing peers (14.0%). Moving forward, SLP will focus on innovating more high-value-added products to tap into the personal care, and healthcare segment, which has high entry barriers and growing potential.

Forecast. We are projecting SLP’s revenue to grow at an FY21-24 CAGR of 6.7% on the back of recovering utilisation rate (from 52% FY21 to 69% FY24f) for its manufacturing segment with: (i) easing labour shortage issues; and (ii) stronger packaging demand in tandem with the global economic recovery. In turn, core PATAMI will grow at a stronger FY21-24 CAGR of 12.6% as we anticipate margin expansion in forward years following more value-added products being introduced and higher MDOPE sales.

Initiate BUY, TP: RM0.97. We initiate coverage on SLP with a BUY recommendation and a TP of RM0.97 based on 14.5x P/E on FY23f earnings, which is in line with its 5- year historical P/E average. We deem SLP a good divvy name in current macroeconomic conditions considering its uninterrupted dividend track record with a sustainable yield of 6.7% in FY23.

Source: Hong Leong Investment Bank Research - 9 Aug 2022