SLP is seeing an uptick in orders, especially for kitchen bag exports to Japan. It expects a pick-up in orders for its machine direction- oriented PE (MDO-PE) film in mid-FY24. We raise our FY24-25F earnings forecasts by 12% and 9%, respectively, lift our TP by 10% to RM1.06 (from RM0.96) and upgrade our call to OUTPERFORM from MARKET PERFORM.

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

1. SLP guided for a moderate improvement in business in FY24 driven primarily by: (i) increased exports to Japan and New Zealand, (ii) sustained packaging demand in Malaysia, and (iii) more orders for its MDO-PE film. It has seen a surge in orders especially for kitchen bags since Dec 2023 which they believe is likely to be sustained. In FY23, kitchen bags accounted for 18% of its total revenue. At present, its utilisation stands at 58% (4QFY23: 52%), vs. optimal level of 70%. Meanwhile, we believe the improved topline performance will translate to better margins by virtue of economies of scale that will help to partially mitigate the elevated utility costs.

2. SLP is hopeful that it will soon secure another buyer for its fully recyclable MDO-PE film, i.e. a multinational Japanese converter in Thailand. It recently received a positive trial report from the customer, validating that its samples have met stringent qualification requirements (including drop test, seal test, puncture test). SLP is optimistic that it will secure more orders after the Hari Raya break, which will double its mono film plant utilisation rate to 40% from 20% currently. The favourable response to SLP’s mono film could be attributed to the trend towards sustainable packaging, driven by among others, more stringent packaging waste regulations in Europe and Vietnam.

3. We understand that SLP is planning for RM20m capex in FY24, marking its first major capital investment since FY19. The capex will go to: (i) a new MDO-PE line (with a monthly capacity of 230 MT) (RM10m), which will make SLP one of the mono film giants in the region; and (ii) the acquisition of a new dormitory for foreign workers.

Forecasts. We raise our FY24F and FY25F earnings forecasts by 12% and 9%, respectively, to reflect improving demand and margins.

Valuations. Correspondingly, we lift our DDM-derived TP by 10% to RM1.06 as we revise our FY24-25F annual dividend forecast to 6.0 sen each (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).

Investment case. We 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, and (iii) prominent position in the regional mono film market, driven by its fully recyclable MDO-PE film in response to growing demand for sustainable packaging solutions. Upgrade to OUTPERFORM from 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 - 6 Mar 2024