SLP's high-quality kitchen and garbage bags have regained strong recognition in the Japanese market, contributing 65% to its topline by geographical breakdown, as customers returned for the superior performance of its products. This stronger purchasing power of Japanese customers, buoyed by a stronger currency, could blunt the impact of MYR's appreciation on cost base, while a higher focus on improving operational efficiencies offsets some capacity constraint amid addition of new clients. We maintain our forecasts, TP of RM1.05 and OUTPERFORM call.

We came away from a post-results engagement with SLP positive of its prospects and assured that the worst may be over even if demand is still soft. The key takeaways are as follows:

1. Reaffirmed Product Superiority in the Japanese Market. After a period of subdued demand, SLP is experiencing a resurgence in orders from Japan for its kitchen and garbage bags. The return of Japanese customers, some of whom that had shifted to competitors, underscores the industry's recognition of SLP's product quality. The summer heat in Japan highlighted the limitations of competitors' products, leading clients back to SLP for its reliability under stringent conditions. This positions SLP favourably in a market that values quality and consistency.
2. Capacity Constraints Amid Growing Demand. The potential acquisition of two new major clients could present a significant growth opportunity for SLP. However, the company's current utilisation rate, which has improved from 48% to 62%, means SLP may need to invest in new machinery over the next 12-24 months if these orders were to stay robust or grow.
3. Impact of Currency Fluctuations on Export Competitiveness. Its main USD cost exposure is for resin as raw material, which is largely hedged by USD-denominated sales. Even so, the strengthening Japanese Yen against the USD increases purchasing power for Japanese buyers, potentially boosting demand. Based on the Yen strengthening against the USD by 5.3% over the past 3 months (this is expected, all else being equal) this will improve revenue by 3%.

Forecasts. Maintained.

Valuations. We also maintain our DDM-derived TP of RM1.05 (CAPM: 7.7%, TG: 2.5%). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

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. Reiterate OUTPERFORM.

Risks to our call include: (i) a prolonged global economic downturn leading to weak consumer demand for plastic packaging, (ii) a sharp rise in resin prices, and (iii) adverse fluctuations in the foreign exchange market.

Source: Kenanga Research - 17 Oct 2024