SLP is in the midst of signing up three new customers for its new mono film or machine-direction orientation polyethylene (MDO-PE) film. Similarly, the demand for its garbage bags and kitchen bags has continued to improve as customers step up re-stocking. Meanwhile, its plan to bring in foreign workers in batches is on track. We maintain our forecasts, TP of RM1.09 and MARKET PERFORM call.

We came away from an engagement with SLP post the recent announcement of its 3QFY22 results feeling reassured of its near-term prospects. The key takeaways from the engagement are as follows:

1. SLP is in the midst of signing up three new customers (from Vietnam, the Philippines and Indonesia, respectively) for its new mono film or MDO-PE film. A new offering by SLP, the product currently only has one buyer based in Vietnam who takes up about 50 tonnes/month of this high-margin product (10% of its MDO-PE production capacity of 500 tonnes/month). We estimate that MOD-PE film contributed to c.3% of SLP’s 3QFY22 turnover (and even more to the bottomline given its higher margins), and the number shall double upon the onboarding of the three new customers.

The growth prospects for MDO-PE film are strong as it requires less material to produce (which saves resources) while boasting better film properties. Its light weight also means reduced transport cost. It is a recyclable substitute to plastic packaging with aluminium film (that is inseparable and hence not recyclable).

2. Similarly, we understand that the demand for its garbage bags and kitchen bags has continued to improve. Its customers are stepping up re-stocking as their inventories run low, coupled with the expectation that cheap prices driven by falling resin prices have run their full course.

3. SLP’s plan to bring in foreign workers in batches is on track. We understand that 40% of them will arrive in Dec 2022, with the balance during next year. The arrival of the new workforce will boost its utilisation rate to 60-65% in FY23, from 50% currently (vs. the optimal level of 75- 80%).

Forecasts. Maintained.

We continue to 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 constraints, (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.

Maintain MARKET PERFORM and DDM-driven TP of RM1.09 (CAPM: 7%, TG: 2%). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

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

Source: Kenanga Research - 9 Nov 2022