SLP’s FY22 results disappointed due to reduced efficiency caused by labour shortage and elevated operating cost. The situation should improve with the gradual arrival of foreign workers and demand picking up from 2HCY23. Though cutting our FY23F earnings by 5%, we maintain our TP of RM1.09 derived from a dividend discount model (DDM) on unchanged dividend forecasts, and MARKET PERFORM call.

Below expectation. FY22 results missed our forecast and consensus estimate by 17% and 13%, respectively. The key variance against our forecast came from reduced efficiency on labour shortage and elevated operating cost, particularly for staff and input costs.

FY22 revenue rose 10% thanks to better product mix skewed towards the higher-margin mono film and kangaroo pouch. However, net profit fell 7% mainly due to reduced efficiency on labour shortage as mentioned. QoQ, net profit plunged 61% mainly due unabated cost pressures.

Outlook. We understand that SLP has obtained clearance to bring in foreign workers in batches (with the first batch already arrived in Dec 2022) and this should boost its utilisation rate to c.55%-60% in FY23 from c.50% as at end-2022. Nonetheless, there is still room for improvement to the optimal level of 75-80%.

SLP is cautious on 1HFY23 amidst global economic uncertainties but expect demand from its overseas markets, i.e. Japan, Australia and New Zealand, to gradually recover from 2HCY23, assuming the global economy is on a recovery path by then.

We cut our FY23F earnings by 5% to reflect the soft patch in 1HCY23 and introduce our FY24F numbers. However, we maintain our DDMdriven TP of RM1.09 (CAPM: 7%, TG: 2%) as we keep our dividend forecasts. There is no adjustment to our TP based on ESG given a 3- star rating as appraised by us (see Page 4).

We like SLP for: (i) its product mix that is skewed towards high-margin non-commoditised products such as kangaroo pouch and mono film, and (ii) its strong cash flow and balance sheet (a net cash position), allowing payment of consistent and 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.

Risks to our call include: (i) a sharp rise in resin cost, (ii) a steep contraction in demand for packaging materials due to a sharp slowdown or recession globally, and (iii) prolonged labour shortages.

Source: Kenanga Research - 27 Feb 2023