SLP’s 1HFY23 results disappointed due to weak demand from both the local and regional markets. It guided for a gradual recovery only by FY24 backed by stronger orders for its new high-margin products such as machine-direction orientation polyethylene (MDO-PE) film. We cut our FY23 and FY24F earnings forecasts by 14% and 15% respectively, lower our TP by 17% to RM0.90 (from RM1.09) but maintain our MARKET PERFORM call.

Below expectations. Its 1HFY23 core net profit of RM6.9m (+19.4% QoQ, -20.2% YoY) is disappointed, making up only 38% each of both our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast was largely due to weaker-than-expected demand from both the local and regional markets.

Results highlights. YoY, its 1HFY23 turnover declined 16% mainly due to: (i) weak exports amidst the global economic slowdown; and (ii) lower ASPs in tandem with lower resin prices. Its 1HFY23 core net profit fell by a larger 20% due to higher labour and utility costs. Recall, the higher labour cost stemmed from an upwards adjustment in the statutory minimum wage effective May 2022, and the reduction in the maximum weekly working hours effective Jan 2023.

QoQ, its 2QFY23 turnover fell 7% due to lower demand from local and regional markets. However, its 2QFY23 core net profit jumped 19% on the MYR’s weakness against the USD.

Outlook. We believe SLP’s 2HFY23 prospects will continue to be weighed down by the global economic slowdown and the permanently higher labour cost structure. The saving grace is the decline in LLDPE resin prices to below USD950/MT, which will boost margins for certain non-commoditized or premium products, given their stickier ASPs.

Our view is consistent with SLP’s guidance for a cautious outlook with only a gradual recovery by FY24. It is hopeful for stronger orders for its new high-margin products, particularly its MDO-PE film, which is printer-friendly and fully recyclable. Its key focus is to broaden its product portfolio and mix, placing emphasis on better overall margins. Its new products include clean room sticky mats and a new cost-effective, higher heat-resistance and 100% recyclable and printable PE film.

Nonetheless, over the medium to long term, the global packaging market should grow between 3% and 5% a year, driven by innovative products with higher barrier performance and greater recyclability. Local players are also well-positioned compared to overseas competitors due to cost advantages. However, the export-dependent sector may face short-term challenges in light of the ongoing economic slowdown.

Forecasts. We cut our FY23 and FY24F net profit forecasts by 14% and 15% respectively to reflect softer demand.

Consequently, our DDM-derived TP is reduced by 17% to RM0.90 (from RM1.09). The adjustment also reflects the recalibration of our WACC assumption to 8.1% (from 7%), having updated the beta value and cost of equity. We maintain our FY23-24F dividend forecast of 5.5 sen. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We continue to like SLP for its: (i) product mix which focuses on high-margin, non-commoditized products such as kangaroo pouches and mono films, (ii) robust cash flows and a strong balance sheet (a net cash position), enabling consistent and generous dividend payments. However, we are concerned that an extended slowdown in the global economy could potentially harm SLP’s earnings. Reiterate MARKET PERFORM.

Risks to our call include: (i) a prolonged global economic downturn leading to weak consumer demand for plastic packaging, (ii) a sharp rise in resin prices, and (iii) adverse fluctuations in the foreign exchange market.

Source: Kenanga Research - 7 Aug 2023