We believe SLP’s 9MFY23 results, due out next week, may miss expectations in the absence of a significant recovery in its margins amidst various global macro headwinds. We cut our FY23-24F net profit by 9-8%, respectively, lower our TP by 6% to RM0.85 (from RM0.90). but maintain our MARKET PERFORM rating. The stock offers a decent dividend yield of 6%.

9MFY23 results may miss expectations. We estimate that SLP’s 9MFY23 core net profit will come in at RM10m-RM11m, making up only 63% to 73% of our full-year forecast and the full-year consensus estimate. The variance against our forecast will come largely from the absence of a significant recovery in its margins amidst various global macro headwinds.

YoY, we expect its 9MFY23 core net profit to decline 22-29% largely due to sector-wide weak product prices which will weigh down on margins.

Outlook. On one hand, we anticipate sustained resilience in the demand for its kitchen bags and garbage bags mainly sold to Japan, contributing c.30% of its total revenue. This is primarily attributable to Japan’s moderate economic recovery and improved business sentiment. On the other hand, demand for its fashion bags is expected to remain subdued, largely due to softening consumer spending in Australia amidst high interest rates and inflation. In FY22, Japan and Australia contributed to about 31% and 4% of SLP’s total sales, respectively, with the balance coming largely from Malaysia.

Forecasts. We cut our FY23-24F net profit forecasts by 9-8%, respectively, to reflect a more tepid margin recovery.

We also reduce our DDM-derived TP by 6% to RM0.85 (from RM0.90), as we tweak our FY23-24F dividend forecasts to 5.0 sen (from 5.5 sen). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see page 5).

We continue to like SLP for its: (i) product mix which focuses on highmargin, 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 over an extended slowdown in the global economy which will weigh down on SLP’s earnings. Maintain 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 forex fluctuation.

Source: Kenanga Research - 2 Nov 2023