SLP's FY22 core earnings of RM15.5m (-12.6% YoY) missed our and consensus expectations. This is due to the seasonally strong plastic demand in 4Q22 did not materialize as expected, as the strengthening USD in that period impacted its export sales. Looking ahead to FY23, we expect SLP to achieve higher utilization rate on the back of higher sales of its high-value-added products and the replenishment of foreign workers. We are upgrading SLP's rating to Hold with an unchanged TP of RM0.89, as we believe the stock has a reasonable balance between risk and reward after the recent correction in its share price.

Below expectation. SLP’s 4Q22 core PAT of RM2.2m (-2.8% QoQ, +1.5% YoY) brought FY22’s sum to RM15.5m (-12.6% YoY). The results missed our/consensus’ expectation at 91.7%/83.7%. FY22 Core PAT was arrived after deducting a one-off disposal gain of RM5.1m that was incurred in 2QFY22.

Dividend. Declared DPS of 1.5 sen (3Q21: 1.5 sen), which goes ex on 15 March 2023. FY22 DPS amounted to 55sen was the same as FY21’s level.

QoQ. Top line declined by -2.8% as weaker export sales (-22.8%) due to the strengthening USD more than offset the higher domestic sales (+13.4%). With fewer export sales (denominated in USD) cushioning the unfavourable exchange rate that lifted its raw material cost, SLP’s GP margin contracted from 12.2% to 6.8%. In turn, core PATAMI plunged by 54.1%.

YoY. The group’s revenue recorded a 1.5% growth on the back of higher ASPs. That said, core PATAMI plunged by 42.3% with GP margin contracted by 430 ppt, given the unfavourable exchange rate on cost as mentioned above.

YTD. Top line registered 9.9% growth, with domestic and export sales growing by 13.2% and 5.5%, driven by the combination of higher ASPs and stronger sales volume as economic recovery gains traction. However, GP margin eased by 28ppt as the elevated operating expenses such as labour and utility costs are more than offset the higher ASPs. Core PAT, in turn, declined by -12.6%.

Outlook. In FY23, we expect SLP to achieve a higher utilization rate on the back of increased sales of its high-value-added products and the replenishment of foreign workers. Among its high value-added products, MDOPE sales is expected to experience strong growth, supported by Malaysia's ambitious target of achieving a 25% recycling rate for plastic packaging by 2025 under the Malaysia Plastic Sustainability Roadmap 2021-2030. Tacky mad and kangaroo bag, two other high value products, are also projected to record higher sales volume in FY23, as suppliers increasingly source from SEA amid the ongoing U.S-China trade war. Meanwhile, we continue to expect stable and consistent orders for SLP's kitchen bag and garbage products from the Japanese market, owing to the inelastic nature of these products. Overall, we expect FY23 to be a year of decent recovery for SLP.

Forecast. Unchanged

Upgrade to HOLD with an unchanged TP of RM0.89, as we believe the stock has a balanced risk-reward profile after the correction in its share price. This TP is 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 6.3% in FY23.

Source: Hong Leong Investment Bank Research - 27 Feb 2023