SLP’s 1HFY24 results disappointed due to cost pressures. Nonetheless, its 1HFY24 core net profit surged 32% YoY on strong exports to Japan, which could be further lifted by the increased buying power of Japanese buyers on the heels of the JPY’s strength of late. We cut our FY24-25F earnings forecasts by 11% and 16% respectively, reduce our TP by 9% to RM1.05 (from RM1.16) but maintain our OUTPERFORM call.

SLP’s 1HFY24 core net profit of RM8.0m missed expectations, coming in at only 43% and 44% of our full-year forecast and the full-year consensus estimate, respectively. The key variance against our forecast came largely from higher-than-expected cost pressures.

It declared DPS of 1.25 sen in 2QFY24, bringing cumulative YTD DPS to 2.25 sen, which appears unlikely to meet our full-year forecast. Hence, we cut our FY24-25F DPS by 17% and 8% to 5.0 sen and 5.5 sen, respectively.

YoY, its 1HFY24 turnover rose 6% as higher plastic packaging sales more than offset lower resin trading turnover. The higher plastic packaging sales were driven largely by brisk exports to Japan, especially for its kitchen bags and garbage bags, which more than offset weaker sales locally and to Australia. The contraction in resin trading turnover, coming predominantly from the local market, was underpinned by the company’s conscious decision to de-emphasise this low value-add and hence low-margin business.

To recap, in FY23, Japan, Malaysia and Australia contributed 65%, 29% and 3% of group turnover. In terms of breakdown by segment, plastic packaging contributed 62% with the balance 38% coming from resin trading.

Its 1HFY24 core net profit surged by a sharper 32% on increased high- margin plastic packaging sales.

QoQ, its 2QFY24 top line inched up by 2% mainly due to higher exports to Japan (+4% QoQ). However, core net profit fell 31% due to: (i) higher material costs (such as resins), (ii) increased transportation expenses (new service tax on logistics and service tax rose from 6% to 8%), and (iii) reduced deliveries (including premium products) during Hari Raya Eid in mid-April and the Japanese Golden Week in early May.

Outlook. SLP could benefit from the increased buying power of its key export market, i.e. Japan, on the heels of the recent JPY’s strength against the USD. On the flip side, the JPY’s strength could also take some wind out of the sails of Japan’s booming tourism industry, which has partially contributed to Japan’s higher demand for plastic packaging. Japan contributes to almost 40% of SLP’s total plastic packaging sales, predominantly kitchen and garbage bags, which are well liked by Japanese customers given their high quality and adherence to sustainability standards via the downgauging technology.

The utilisation rate for its MDO-PE film (fully recyclable mono film) has increased to >30% (from 20% in 1QCY24) with more inquiries from domestic and ASEAN markets. However, some overseas customers (particularly from Thailand and Vietnam) are delaying orders due to their weak local currencies against the USD. On a more cautious note, we expect cost pressures from higher logistics costs (due to the service tax hike) and potential minimum wage increases. Nevertheless, these should be partially mitigated by enhanced labour automation and gradually passing on costs to customers.

Forecasts. We cut our FY24-25F net profit forecasts by 11% and 16%, respectively, to reflect higher costs.

Valuations. Consequently, we reduce our DDM-derived TP by 9% to RM1.05 (from RM1.16) as we tweak our FY24-25F divided forecasts to 5.0 sen and 5.5 sen, respectively (from 6.0 sen). We believe the company is reinvesting a portion of its earnings in strategic assets like the new mono film machine, with its current net cash position standing at RM85m. The revised TP also reflects the recalibration of our WACC assumption to 7.3% (from 7.7%), having updated the beta value and cost of equity. 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 like SLP for its: (i) product mix which focuses on high-margin, non-commoditised 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. Reiterate OUTPERFORM.

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) adverse fluctuations in the foreign exchange market.

Source: Kenanga Research - 13 Aug 2024