While its labour shortage issue is abating, higher electricity cost and a slowdown in demand due to an uncertain global economic outlook are new challenges facing SLP. To address such challenges, it is focusing on high-margin products, and seeking to expand its overseas customer base. We maintain our forecasts, TP of RM1.09 and MARKET PERFORM call.

The key takeaways from the engagement are as follows:

1. SLP guided that the challenges faced in FY22 such as labour shortage and hike in operating cost are expected to abate slightly in FY23. The arrival of new foreign workers in Dec 2022 has improved its plant utilization rate to c.54% in January 2023 (vs. 42% in 4QFY22 and 48% in FY22). We expect SLP’s utilisation rate to rise further to 60%-65% in FY23 (vs. the optimal level of 75%-80%).

2. SLP is hoping to offset the higher electricity cost following the Jan 2023 hike by focusing on high-margin products such as machine-direction orientation polyethylene (MDO-PE) film, kangaroo pouch and disposable medical bags. The MDO-PE film is getting more enquiries, being regarded as a sustainable packaging product, and we understand that some overseas buyers are currently conducting product trial testing. Demand for its kangaroo pouch widely used in the medical field is also growing, thanks to a customer in the medical field which is expanding its operations.

3. We understand that SLP will install five automations lines by 1QFY23 for auto packaging of end-products. This will help reduce its dependence on manual labour. In the meantime, SLP will build 18 hostels for foreign workers at a cost of c.RM6m which is expected to be completed by FY24.

Forecasts. Maintained.

In our view, the outlook for the plastic packaging sector in 2023 is unfavourable due to a slowing global economy, while supply-chain disruptions persist, affecting the operations of end-users and hence demand for plastic packaging. We expect a soft patch especially during 1HFY23 but 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 resin (see Page 2).

We maintain our DDM-derived 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).

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 generous dividend, courtesy of its strong cash flows and cash-rich balance sheet. Maintain MARKET PERFORM.

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 - 28 Feb 2023