SLP’s FY23 results disappointed on cost pressures. Its FY23 core net profit dropped 34% due to sluggish exports and higher labour and utility costs. A more sustained recovery of the plastic packaging industry still hinges on the health of the global economy. We cut our FY24F earnings by 13% but maintain our TP of RM0.96 and MARKET PERFORM call.

Below expectations. SLP’s FY23 core net profit of RM10.9m disappointed, missing our forecast and the consensus estimate by 9% and 23%, respectively. The key variance against our forecast came from its inability to contain or pass on higher costs.

It declared a final dividend of 1.25 sen, bringing FY23 full-year dividend to 4.75 sen which was in line with our expectation.

YoY, its FY23 revenue dropped 13% primarily due to: (i) sluggish demand from its overseas markets, i.e. Japan (-17%) and Australia (- 49%), and (ii) lower ASPs in tandem with lower resin prices and heightened market competition. In FY23, Japan and Australia contributed 29% and 3% of SLP’s total sales, respectively.

Its core net profit fell by a sharper 34% stemming largely from compressed margins due to elevated labour and utility costs. Recall, the higher labour cost resulted from an upward adjustment in the statutory minimum wage effective May 2022 and also the reduction in the maximum weekly working hours effective Jan 2023.

QoQ, its 4QFY23 turnover inched up 3% mainly attributed to higher sales to Japan (+6%). The uptick was likely driven by improved demand for kitchen bags and garbage bags due to: (i) the aftermath of economy re-opening post pandemic, and (ii) customer restocking in anticipation of increased tourism in Japan. However, its core net profit dropped 19% due to cost pressures (e.g. labour and utilities).

Outlook. SLP has encountered delays and extended lead time for imported goods from North America due to the recent Red Sea conflict. Nonetheless, its supplies from Middle East and Asia Pacific remain relatively unaffected. Meanwhile, a more sustained recovery of the plastic packaging industry still hinges on the health of the global economy.

SLP is expanding its customer base with an emphasis to market its MDO-PE film – a fully recyclable mono film – where SLP has competitive edge as a pioneer. The upswing in inquiries regarding this mono film is indicative of a broader industry trend towards the adoption of sustainable packaging practices. SLP is strategically targeting the SEA market focusing on Vietnam and Philippines, while collaborating with converters in these countries involved in European exports. Additionally, SLP’s new MDO-PE film machine, set to be operational by Oct 2024, shall fetch favourable margins and position the company for growth.

Forecasts. We cut our FY24F earnings forecast by 13% to account for higher costs. Meanwhile, we introduce our FY25F numbers.

Valuations. We keep our FY24F dividend forecast of 5.5 sen, considering its strong net cash position of RM84.3m, hence maintaining our DDM-derived TP of RM0.96 (CAPM: 7.8%, TG: 2%). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. 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. Nevertheless, we are concerned about a slower-thanexpected global economic recovery which will cap SLP’s earnings growth. Reiterate MARKET PERFORM.

Risks to our call include: (i) an extended slowdown in the global economy, dampening consumer demand for plastic packaging, (ii) a sharp rise in resin prices, and (iii) supply chain disruptions.

Source: Kenanga Research - 27 Feb 2024