The Group’s earnings are expected to recover modestly, driven by stimulus and more moderate inflation in its key market, Japan. Notably, Japan contributed RM31.3m or 38% to the Group’s total revenue in 1HFY24. However, recovery may be constrained by a stronger ringgit and potentially higher minimum wage, which could exert pressure on the margin and reduce competitiveness of its exports. In the domestic market, demand is expected to improve, supported by resilient domestic consumption and rising tourism. However, the average selling price may remain depressed due to stiff competition. Maintain Neutral with an unchanged TP of RM0.86.

• 2QFY24 results round up. During the quarter, net profit declined by 32.7% YoY to RM3.3m despite higher revenue growth of 11.0% YoY. This drop was mainly attributed to lower ASP, reflecting intense competition in the packaging industry. Additionally, higher material, transportation and insurance costs exacerbated by the imposition of a service tax on logistic services and the increase in the service tax rate from 6% to 8%, further pressured margins. As a result, the net profit margin for 2QFY24 decrease by 1.3ppts YoY to 8.0% (2QFY23: 9.3%).

• Stronger Ringgit. The ringgit climbed to a 30-month high of 4.1 against the US dollar in Sep 2024, buoyed by the US Federal Reserve’s unexpectedly larger interest rate cut, which fueled market optimism. While a stronger ringgit indicates economic stability, it could reduce the competitiveness of the Group’s export.

• Potentially higher minimum wage. With the announcement of the minimum salary for civil servants already adjusted to above RM2,000, the government is being urged to increase the current minimum wage of RM1,500 in the upcoming Budget 2025 announcement on Oct 18. If implemented, this could further strain the margins, which are already under pressure from the intense competition

• Outlook. The flexible plastic packaging industry continues to grapple with a supply-demand imbalance and elevated production costs. Despite these headwinds, there are signs of gradual improvement in the operating environment and demand recovery. Demand is expected to strengthen and supported by resilient domestic consumption and rising tourism. The Group has allocated RM6.0m to increase production capacity, aiming to penetrate new markets and improve production efficiency. A new machine purchased from Europe is scheduled to be installed and commissioned by the fourth quarter of this year.

Source: PublicInvest Research - 17 Oct 2024