SLP’s FY24F earnings growth will be driven by increased sales of MDO-PE film in Southeast Asia and the introduction of new products in the Japanese market. In response to the current soft market, intensifying competition and lower resin prices, SLP has adjusted down its ASP. We keep our FY23F net profit but cut our FY24F earnings by 4% and maintain our TP of RM0.85 and MARKET PERFORM call.

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

1. Some new drivers. SLP is hopeful for improved sales in FY24 (which is consistent with our assumption) primarily driven by: (i) increased demand for its fully recyclable MDO-PE film in Southeast Asia, and (ii) the introduction of new products in the Japanese market such as tray liners for food packaging in convenience stores. It is hopeful for its utilisation to therefore rise from the current 50% to >55% by mid-2024 (which is still at a distance away from the optimal level of 75%-80%).

2. Mono film is gaining traction. There is a growing interest in its MDO-PE film, known for its sustainable and fully recyclable packaging attributes, as reflected in increased customer enquiries and requests for sample testing from some overseas buyers. Its frequent participation in trade shows such as Propak Vietnam 2023 recently is certainly helping. It also has plans to strengthen the barrier properties (i.e. resistance against light, moisture and oxygen) of its MDO-PE film via collaboration with its material supplier. This will make the film more suitable for food packaging and even enable it to extend the shelf life of the food.

3. Price pressure. In response to the current soft market, intensifying competition and lower resin prices, SLP has adjusted down its ASP. On a brighter note, this has made SLP’s products more appealing to its Japanese customers who are struggling to cope with high import costs due to the weak JPY. In FY22, Japan accounted for 31% of SLP’s total sales. On a more cautious note, this means SLP will not be able to fully pass on the higher labour and energy costs to its customers.

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.

Forecasts. We maintain our FY23F net profit but reduce FY24F earnings by 4% to account for persistent cost pressure.

However, we keep our FY23-24 annual dividend forecast of 5.0 sen each, considering the company’s strong net cash position of RM81m. Hence, we maintain our DDM-derived TP of RM0.85 (CAPM: 7.9%, TG: 2%). 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 high margin, non-commoditized products such as kangaroo pouches and mono films, and (ii) robust cash flows and a strong balance sheet (a net cash position), enabling consistent and generous dividend payments. On the other hand, SLP will not be spared weak demand for plastic packaging amidst a global economic slowdown. 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 - 17 Nov 2023