SLP guided for no meaningful pick-up in demand in 2QFY23, after a soft 1QFY23. On the other hand, its cost pressures remain unabated, of which it is trying to contain by, among others, minimising unnecessary overtime shifts. On a brighter note, its environmentallyfriendly machine direction-oriented polyethylene (MDO-PE) film is gaining traction amongst its customers. We maintain our forecasts, TP of RM1.09 and MARKET PERFORM call.

We came away from a recent engagement with SLP feeling cautious on its outlook. The key takeaways are as follows:

1. There was a YoY slowdown in business in 1QFY23 as manifested in an overall utilisation rate of <50% vs. 54% a year ago. SLP guided for no meaningful pick-up in demand in 2QFY23. However, we expect its overall utilisation to improve to 55%-60% in 2HFY23: (i) as productivity improves from the seasonally low period in 1Q (due to long festive holidays), and (ii) assuming the global economy is poised for a recovery by then.

2. SLP also guided for unabated cost pressures sustaining into 2QFY23. It is stepping efforts to contain costs by minimising unnecessary overtime shifts (especially during festive periods). Also helping, is a slight improvement in utilisation that should bring down per unit cost. In addition, it is installing five automated packaging lines (of which one was completed in 1QFY23 and the remaining four by 3QFY23) that will reduce its dependence on labour which cost is consistently going up.

3.On a brighter note, we understand its MDO-PE film is gaining traction with more enquiries from its customers, both converters and brand owners, while some are already conducting testing on the product. We believe MDO-PE film has tremendous growth potential as it meets the definition of “circular packaging”, i.e. commercial packaging materials that are reusable, recyclable or compostable. MDO-PE film is recyclable. SLP is planning to add another machine to produce MDO-PE, in addition to its two existing lines.

Forecasts. Maintained.

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).

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 the period as they gain market shares 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.

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: (i) a surge in resin cost, (ii) a sharp slowdown or recession in the global economy, hurting demand for packaging materials, and (iii) labour shortages

Source: Kenanga Research - 16 May 2023