SLP guided for sustained soft demand in 2HFY23 primarily due to weakened consumer spending at its key export markets. It is going on a circular packaging roadshow in Southeast Asia to promote its fully recyclable machine direction-oriented polyethylene (MDO-PE) film. We cut our FY23 and FY24F earnings forecasts by 5% and 6% respectively, but maintain our TP of RM0.90 and MARKET PERFORM call.

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

1. SLP guided for sustained soft demand in 2HFY23 primarily due to weakened consumer spending at its key export markets, i.e. Japan, Australia and New Zealand amidst high inflation and economic slowdown.

2. After the successful installation of one automated packaging line in 1QFY23, SLP’s plans to add another four lines by 3QFY23. There is a shift in its customers’ preference from manual to automated packaging solutions for improved efficiency and productivity, as well as consistency in packaging quality. SLP is also installing a new converting machine to target the personal hygiene product sector.

3. In terms of its ESG initiatives, SLP is partnering its resin suppliers to co-host a circular packaging roadshow across the Southeast Asia region, starting from Ho Chih Minh City in Vietnam this month. The roadshow has thus far clocked up a considerable number of registrations, pointing to a strong turnout of potential customers. SLP will feature its MDO-PE film during the roadshow which is fully recyclable and hence meets the definition of “circular packaging”. Its focus on MDO-PE film is also part and parcel of its long-term strategy to transition from lower-margin to higher-margin products.

Forecasts. We cut our FY23 and FY24F net profit forecasts by 5% and 6% respectively to account for softer demand. However, we maintain our DDM derived TP of RM0.90 (CAPM: 8.1%, 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. 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. Nonetheless, the export-dependent sector may face short-term challenges amidst the global economic slowdown.

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 - 8 Aug 2023