SLP’s 9MFY22 results beat expectations due to better product mix. We also expect better prospects in FY23 with the arrival of foreign workers. We understand that SLP has received the clearance to bring in foreign workers from Dec 2022 that should boost its utilisation rate to c.55-60% in FY23 from 50% currently. We raise our FY22 and FY23 earnings forecasts by 11% and 9%, respectively, and increase our TP by 18% to RM1.09 (from RM0.92). Maintain MARKET PERFORM.

9MFY22 core net profit of RM14.1m beat expectations at 80% and 79% of our full-year forecast and full-year consensus estimates, respectively. We believe the key variance against our forecast came from a better product mix skewed towards the high-margin mono film.

9MFY22 revenue rose by 13% due to: (i) higher export volume, (ii) inflated ASPs (due to the higher cost of input resin), and (iii) a better product mix skewed towards the high-margin mono film and kangaroo pouch. However, its core net profit only increased by 4% mainly due to efficiency loss amidst labour shortage.

We understand that SLP has received the clearance to bring in foreign workers in batches with the first batch expected in Dec 2022. This should boost its utilisation rate to c.55-60% in FY23 from 50% currently, although there is still room to improve further to the optimal level of 75-80%.

Forecasts. We raise our FY22F net profit by 11% largely to reflect a better product mix with a higher composition for mono film. We also raise our FY23F earnings by 9% largely to reflect a better utilisation rate on the arrival of foreign workers, as well as sustained improvement in its product mix.

We like SLP for: (i) the sweet spot the local plastic packaging industry is currently in, i.e. weakening cost of input resin while selling prices for products are holding up due to production curbs globally, especially in Europe, due to high energy cost or energy supply constrains, (ii) its product mix that is skewed towards high-margin non-commoditised products such as kangaroo pouch and mono film, and (iii) its strong cash flow and balance sheet (a net cash position), allowing it to consistently pay out generous dividends. However, we are concerned over a significant decline in demand in the event of a sharp slowdown or recession in the global economy.

We raise our TP by 18% to RM1.09 (from RM0.92), having rationalised our valuation basis to DDM (CAPM: 7%, TG: 2%) from PER given SLP’s steady profit trend and that it is more inclined to distribute the profits as dividends, vs. investing for growth. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Maintain MARKET PERFORM.

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 (iii) prolonged labour shortages.

Source: Kenanga Research - 7 Nov 2022