SLP is not spared the higher electricity cost from 1 Jan 2023 but this will be offset by a product mix with a higher proportion of highmargin products. The demand for its new mono film or machinedirection orientation polyethylene (MDO-PE) film is gaining traction with strong interest shown by a number of potential customers. Meanwhile, its utilisation rate is rising in tandem with the arrival of foreign workers. We maintain our forecasts, TP of RM1.09 and MARKET PERFORM call.

We came away from a recent engagement with SLP feeling reassured of its near-term prospects. The key takeaways from the engagement are as follows:

1. SLP guided for an additional cost of RM1.8-2.0m per year with the hike in the electricity tariff from 1 Jan 2023. This is equivalent to 6-7% of our FY23F PBT forecast. However, we expect this to be offset by a product mix that is better than what we previously assumed, with a higher proportion of high-margin products such as kangaroo pouch, MDO-PE film and disposable medical bags.
2. We understand that the demand for its kitchen bags remain intact. Its customers are re-stocking as their inventories are running low, coupled with the expectation that cheap prices driven by falling resin prices have run their full course.
3. SLP is looking for new overseas customers to anchor further expansion of its MDO-PE film segment. We understand that SLP is in the midst of negotiating with two new customers, one each from Malaysia and Vietnam, which have been given product samples for evaluation. Currently, SLP is supplying about 80 tonnes/month to two customers in Vietnam (16% of its MDO-PE production capacity of 500 tonnes/month).
4. We understand that SLP has received 45% of total foreign workers it applied for, with the balance arriving in FY23. The availability of these new foreign workers has boosted its utilisation rate to 52% at present, from 47% in 3QFY22. We expect SLP’s utilisation rate to rise further to 60-65% by FY23 (vs. the optimal level of 75-80%).

Forecasts. Maintained.

We expect a less favourable demand outlook for the plastic packaging sector in 2023 on the back of a slowing global economy, while supplychain disruptions continue to linger, affecting the operations of end-users (and hence their demand for plastic packaging). We expect a soft patch especially during 1HFY23. This will be partially mitigated by: (i) the easing of labour shortages, resulting in better productivity and efficiency gains, (ii) improved margins as high-cost resin inventory is gradually depleted, and (iii) the declining cost of input resin (see Chart on next page).

We see SLP’s strengths in: (i) its product mix that is skewed towards highmargin non-commoditised products such as kangaroo pouch and mono film, and (ii) its strong cash flow and balance sheet (a net cash position), allowing it to consistently pay out generous dividends.

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 5).

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 - 23 Dec 2022