SLP’s 1QFY23 results disappointed due to weak exports and higher operating cost. SLP is hopeful for 2HFY23, assuming the global economy is on the mend by then, generating better demand from its key overseas markets, i.e. Japan, Australia and New Zealand. For now, we cut our FY23F and FY24F earnings forecasts by 18% and 6%, respectively, but keep our TP of RM1.09 based on dividend discount (DDM) model, and MARKET PERFORM call.

Below expectations. 1QFY23 results missed expectations at only 15% each of both our full-year forecast and full-year consensus estimate. The key variances against our forecast came from weak exports and higher operating cost, particularly, the more significant impact on staff cost pursuant to the recent amendment to Employment Act that reduces the maximum weekly working hours to 45 (from 48).

Results’ highlights. 1QFY23 revenue slipped 12% largely due to softer exports on the slowdown in the global economy. Net profit declined by a larger magnitude of 30% due to higher operating cost, especially staff cost as mentioned.

Outlook. Market researcher Mordor Intelligence projects the global plastic packaging market to grow at a CAGR of 3.5% in 2022-2027. We believe local players could grow at a faster pace during this period by gaining market share from overseas producers that are losing competitiveness due to the rising production cost. However, over the immediate term, this export-dependent sector will not be spared the global economic slowdown.

Although SLP is cautious on 1HFY23 amidst the global economic uncertainties, it is hopeful for 2HFY23 assuming the global economy is on the mend by then, resulting in better demand from its key overseas markets, i.e. Japan, Australia and New Zealand.

We cut our FY23-24F earnings forecasts by 18-6%, to reflect softer exports and higher operating cost. However, we maintain our DDMderived TP of RM1.09 (CAPM: 7%, TG: 2%) as we keep our dividend forecast of 5.5 sen annually. 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 flows and balance sheet (a net cash position), allowing payment of consistent and generous dividends. However, we are concerned over a prolonged slowdown in the global economy that will hurt SLP’s earnings. 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 - 8 May 2023