A recent meeting with management reaffirms our optimism on the Group’s long-term outlook, driven by sustained demand for consumer packaging. Near-term outlook for the Group may continue to be challenged by weak demand for industrial packaging on the back of the global economic slowdown however. Nevertheless, the Group is well-placed to weather growing economic uncertainties, underpinned by its debt free capital structure with a total cash level of RM94.0m, and improvements in its efficiency and productivity arising from the new production lines. We keep our earnings forecast unchanged and retain our Neutral call given weak industry dynamics, with unchanged PE-based TP of RM1.46.

• 1QFY23 results round-up. During the quarter, net profit grew by 10.0% YoY to RM6.6m despite lower revenue. This is mainly due to better product mix better efficiency from new production lines. Pre-tax profit margin improved to 9.1% from a recent-low of 5.0% in the preceding quarter. Lower statutory tax rate of 2.0% is due to reinvestment allowance in one of its subsidiaries meanwhile, helping cushion the margin squeeze. The reinvestment allowance expires in Dec 2024, though is likely to be extended further.

• Capacity expansion and product innovation. The Group remains committed to investing in cutting-edge technology and expand market share. Approximately RM30.0m of capital expenditure has been allocated for FY2023. The Group had successfully commissioned two units of Nano-technology 67- layers stretch film machines (9th Cast Stretch Film machine in 2021 and 10th Cast Stretch Film machine in 2022). The two units of stretch film machines are supplemented with Nano-technology which enable the Group to offer further product innovation and differentiation. Its new products (Quantum-N) machine stretch film is well received by customers. With two additional units of Blown Co-extrusion machines to be added by end of 2023, production capacity is expected to increase to 12,200 MT per month.
   
• Outlook. The Group is expected to continue facing near-term headwinds. Nevertheless, there are signs of gradual improvements in the operating environment in the coming quarters. Following China’s reopening, supply chains around the world continue to recover. Resin prices and freight rates are falling back to pre-pandemic levels. The lower freight rate and favourable exchange rate is expected to boost the Group’s export market, particularly Europe, to cushion the weakness in domestic industrial packaging market. Along with continuous focus on better product mix, supply chain, cost management, prudent management and new market expansion, we anticipate earnings to remain resilient in the coming quarters.

Source: PublicInvest Research - 8 Jun 2023