SLP is expecting stronger quarters ahead. Its premium kitchen bags and garbage bags are gaining market share in Japan and its food-grade bags are making headways in New Zealand. Resin cost should remain stable due to oversupply and SLP is lowering their ASP to compete more effectively. Overall, the group is repositioning its product range and marketing more aggressively. It is also adding new MDO machines to serve new clients. We maintain our forecasts as we had lowered ASP in the previous 3QFY24 results note, TP of RM1.00 and OUTPERFORM call.

We came away from a post-results engagement with SLP feeling positive of its prospects. The key takeaways are as follows:

1. 9MFY24 highlights. SLP estimated that as much as two third of the 3QFY24 tightening in PBT margin, from 10% to 3% QoQ (PBT of RM4m to RM1.2m) was on the back of a stronger MYR. USD exports ended lower when translated back to MYR while production was drawing down raw materials from inventory which was stocked when the MYR was weaker. However, it's 9MFY24 core net profit still manage to grow 14% YoY on favourable product mix and higher sales volume.
2. Capacity expansion for growing demand. SLP is adding a new Machine-Directed Orientation (MDO) machines from Germany (cost about RM6m), increasing production capacity to 500,000 metric tonnes per month to meet future customers orders. Notably, SLP's first MDO line, established 16 years ago, has been repurposed to a blown film line. Recent utilisation has risen QoQ from 54% in 2QFY24 to 57%. Additionally, SLP is strengthening its operations by expanding its manufacturing team.
3. Positive outlook. Japanese market remains strong with 5% YoY growth, as compared to the 8% YoY revenue decline overall for SLP in 3QFY24. Old customers are coming back for its superior quality kitchen and garbage bags after experiencing quality limitations with rival products. Orders from New Zealand for food-grade bags also grew 27% QoQ driven by: (i) a shift to reduce reliance on China, (ii) ready documentation to meet New Zealand's regulations, and (iii) the high quality of SLP products. SLP has also adjusted down its overall ASP (by <5%) to remain competitive whilst still able to maintain margins thanks to better economies of scale. On the cost side, USD resins prices remain stable for the coming quarters due to oversupply in the market.
4. Potential new customers. SLP is currently engaged in discussions with several prospective customers, including one with relatively large quarterly revenue potential which is in the final stages of due diligence. If secured, business operations are expected to commence in 2QFY25. Additionally, existing customer may be increasing orders as they streamline procurement by reducing their vendor base from 20 suppliers to just four, of which SLP is one of them.

In short, SLP's more proactive marketing, ASP adjustments and capacity expansion investments reflect optimism of long-term upward demand for packaging, notably environmentally friendlier packaging materials.

Forecasts. We maintained our forecast as we had adjusted lower our ASP by 5% in previous results note dated 11/11/2024.

Valuations. We maintain our DDM-derived TP of RM1.00. 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. Maintain OUTPERFORM.

Risks to our call include: (i) an extended slowdown in 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 - 18 Nov 2024