We came away from a post-2QFY23 results engagement with ABLEGLOB and are cautiously optimistic about its FY23 and longer-term outlook despite current macro challenges. The key takeaways are as follows: (i) shifting paradigm in packaging consumption led to decline in tin manufacturing, (ii) production and utilisation rate recalibrated to better measures, and (iii) stabilised freight cost despite of potential rebound threat.

Shifting paradigm in packaging consumption led to decline in tin manufacturing.

In 1HFY23, ABLEGLOB's tin manufacturing segment revenue dropped by 15% YoY due to a strategic price adjustment following high-cost inventory depletion and as a mean to stay competitive in the intense market condition. Notably, the shift to cost-effective soft packaging has dampened the tin packaging demand, resulting in a 47% decline in segmental PBT, owing to the reduced revenue and higher production costs.

Production and utilisation rate recalibrated to better measures.

After recalibrating production and utilization rates measurement at Malaysia facility, the total 1HFY23 output in the F&B segment reached 40.2kMT, a significant improvement from FY22, with a utilization rate of 61%. This boost in production can be attributed to heightened consumption for dairy products within its targeted client base. However, it is worth noting that the lower utilization rate observed in dried milk products during 1HFY23 may be a result of resource allocation prioritizing higher-margin products and a potential decline in demand for dried milk products.

Stabilised freight cost despite of potential rebound threat.

Against the backdrop of c.75% export by ABLEGLOB, the freight cost is expected to maintain status quo despite of escalating global demand driven by Christmas festive procurement. To recap, the global freight cost that was skyrocketed previously due to Covid-19 disruption has gradually normalised to pre-pandemic levels, thanks to the resumption of global logistic activities. That said, the company is optimistic that the cost is manageable despite of the freight cost adjustment owing to escalating Christmas sales prepping.

Impact

We maintain our earnings forecasts.

Valuation

In view of recent price weakness, we upgrade Buy on ABLEGLOB with an unchanged target price of RM1.50/share based on SOP valuation method.

Source: TA Research - 15 Sept 2023