SLP’s 9MFY23 results disappointed on weak sales and cost pressure, which also led to a 38% YoY decline in its 9MFY23 core net profit. It is hoping to onboard a new Thai customer specialising in pet food packaging. We cut our FY23-24 earnings by 13-5%, respectively, but keep our 5.0 sen dividend forecast and hence our DDM-based TP of RM0.85. Maintain MARKET PERFORM.

Below expectations. Its 9MFY23 core net profit of RM8.7m missed expectations, coming in at only 64% of our full-year forecast (despite our recent 9% downgrade) and 58% of the full-year consensus estimate. The key variance against our forecast came from the double whammy of lower-than-expected sales and cost pressure.

Results’ highlights. YoY, its 9MFY23 turnover declined 14% due to: (i) weaker exports (including Japan and Australia), and (ii) a reduced ASP resulting from lower resin prices and heightened competition. Its core net profit fell by a sharper 38% on reduced margins from higher utility costs and poorer cost absorption from lower plant utilisation.

QoQ, its 3QFY23 revenue grew 11% due to increased sales in the domestic market (+10%) and Japan (+21%). However, its core net profit eased 17% due to a change in product mix towards more low-margin products, higher utility costs and increased wastages from the development of new products.

Outlook. The outlook for the plastic packaging industry is weighed down by the global economic slowdown. As such, we expect a muted 2HCY23 for players despite the 2H traditionally being the peak season.

SLP is stepping up its marketing efforts in Southeast Asia. It is hoping to onboard a new Thai customer specialising in pet food packaging, particularly for its high-margin, fully recyclable MDO-PE film. Additionally, it has garnered significant interest through a regional circular packaging seminar co-hosted with a raw material supplier in Aug 2023, promoting sustainable packaging such as its MDO-PE film. It has received inquiries but it takes time for these to eventually translate to actual sales.

Forecasts. We cut our FY23-24F net profit by 13-5%, respectively, to reflect weaker sales and higher costs.

However, we maintain our FY23-24F annual dividend of 5.0 sen each and hence DDM-derived TP of RM0.85 (CAPM: 7.9%, TG: 2%).

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 - 14 Nov 2023