SLP’s utilization rate is anticipated to recover in 2H22, thanks to the return of foreign workers and 2H seasonally strong orders amid the festive seasons. Nevertheless, we cut our FY22 earnings by 9% while keeping FY23 and FY24 earnings unchanged to reflect the slower-than-expected foreign workers arrival. We also project a margin expansion in SLP’s manufacturing segment in 3Q22, but this is slated to taper off in 4Q22 due to the lag effect. All in, we affirm our BUY rating with an unchanged TP of RM0.97.

We Recently Met Up With Management With the Following Key Takeaways:

Utilization rate to recover in 2H22. Recall that 2Q22’s utilization rate remained at a subdued level of 49.5% (vs 1Q22: 54%) due to the ongoing labour shortage. We gather that SLP’s worker numbers has plunged to c.260 from 407 workers pre pandemic. Nevertheless, the group has brought in 14 foreign workers from the first round of recruitment (applied: 105 workers; acceptance rate: 13%). The second round of recruitment, which management has applied for 120 workers, and believed to have a higher acceptance rate (c.50-55%), is expected to arrive by end-Oct.

Resin cost to trend down. The group believes polymer prices will continue to be under pressure in 2H22, considering (i) weak demand from China (the world's largest polymer user), (ii) protracted US-China trade war and (iii) new petrochemical capacity kicks in – including the Petronas Pengerang Integrated Complex. However, with most of SLP's plastic product ASPs being adjusted quarterly or on a contract basis (3 or 6 months) benchmarking polymer prices, we gather that 3Q's plastic ASPs is still on an upward trajectory but will gradually ease in 4Q22 (lag effect) in response to the lower polymer prices. Hence, we anticipate margin expansion in SLP's manufacturing segment for 3QFY22.

Sales outlook. Following several price adjustments throughout 1H22, product sales from the household (kitchen bag) and hygiene (film for diapers) segments remained resilient, while garbage bag sales saw a slowdown given relatively elastic demand. Sales from the medical segment and MDOPE, which provides superior margin, gained traction, with customers doubling SLP’s medical product orders and stronger MDOPE sales from Vietnam. Despite the ease in polymer prices might lead to importers holding back orders to bet on a lower price, this will be cushioned by a combination of 2H seasonally strong orders from the upcoming festive seasons such as Christmas and Chinese New Year, and resilient demand from Hygiene, Medical and Household (c. 45% FY) segments due to price inelasticity.

Automating the converting line. The group will allocate RM1.2m to automate five unit converting lines to reduce labour reliance. Generally, five manually-operated converting lines will require seven workers to operate (5 operators + 2 packers). With the help of automation, a maximum of three workers are needed to function the five automated converting lines (1 operator + 2 packers). In addition, automating the converting line is expected to lift the group’s efficiency and output yield, given the lower operating downtime.

Forecast. In view of the slower-than-expected foreign workers arrival, we cut our FY22 earnings by 9% with a lower utilization rate assumption of 55% (from 60%) while keeping FY23 and FY24 assumptions and earnings unchanged.

Maintain BUY, with a TP of RM0.97 based on 14.5x P/E on FY23f earnings, which is in line with its 5 year historical mean P/E. We deem SLP a good divvy name in current macroeconomic conditions considering its uninterrupted dividend track record with a sustainable yield of 6.8% in FY23.

Source: Hong Leong Investment Bank Research - 22 Sept 2022