We cut our FY22/FY23 earnings forecasts for SLP by 22%/15%, reduce our TP by 7% to RM0.92 and downgrade our recommendation to MARKET PERFORM from OUTPERFORM. Its 1HFY22 results missed expectations due to lower productivity on the back of labour shortage. We expect the issue to linger on over the short term, albeit partially mitigated by slight easing in cost pressures on softening resin prices.

Below expectations. 1HFY22 core profit of RM8.7m missed our expectation at only 39% of our full-year forecast. Consensus estimates are unavailable. The key variance against our forecast came from lower productivity due to labour shortage.

1HFY22 performance. Its turnover grew 5.7% YoY. Higher ASPs (in tandem with higher resin prices), were partially offset by weaker sales volumes on lower production (judging from an estimated average utilisation rate of c.50% in 2QFY22 vs. 55% during the preceding quarter). However, its core net profit contracted by 17% YoY on dis economies of scale on the back of a lower utilisation rate, coupled with a higher labour cost due to higher statutory minimum wage of RM1,500/month (vs. RM1,200/month previously) coming into effective from May 2022.

Forecasts. We cut our FY22E/FY23E net profit forecasts by 22%/15% largely to reflect the persistent lower sales volumes due to lower production on labour shortage.

Outlook. We believe SLP’s operations will not immediately return to optimum levels on the back of persistent labour shortage. The recruitment of foreign labour will likely turn out to be a long-drawn affair given that it involves government-to-government negotiation. While SLP has thus far managed to bring in some foreign workers, the number is still far from desired. Meanwhile, while SLP has embarked on automation which is a step in the right direction, their dependence on foreign workers will remain significant over the medium term. On a brighter note, resin prices have come off by c.15-20% to about USD1,280/MT from the recent peak in April 2022 (see chart on Page 2). Indications are pointing towards more weaknesses in 2H 2022 as: (i) there is significant new resin manufacturing capacity coming onstream; and (ii) the weak demand from China (which practises zero Covid policy has yet to fully normalise from the disruptions arising from the intermittent lockdowns). The softening resin prices will boost margins of certain non-commoditised/premium products given the stickiness of their ASPs against the downside.

TP and Recommendation. We reduce our TP by 7% to RM0.92 (from RM0.99) based on 13x FY23E PER, at a 30% premium to its peers’ average forward PER of 10x to reflect: (1) SLP’s product mix that is skewed towards high-margin non-commoditised/premium products such as kangaroo pouch and mono film; (2) its strong balance sheet in a net cash position; and (3) a higher dividend yield of >6%. There is no adjustment to our TP based on ESG criteria given a 3-star rating as appraised by us. Downgrade to MARKET PERFORM (from OUTPERFORM) given the limited upside to its share price.

Risks to our call: (i) sustained higher resin cost, (ii) recovery in demand for packaging materials from the pandemic cut short by a global recession; and (3) prolonged labour shortages.

Source: Kenanga Research - 8 Aug 2022