A recent meeting with management reaffirms our optimism about the Group's long-term outlook, driven by the megatrend of demand for sustainable and eco-friendly flexible packaging. However, the Group's near-term outlook may remain challenged by subdued demand for industrial packaging, impacted by the global economic slowdown, higher operating costs and supply demand imbalance. We trimmed our FY25F-26F forecast by 12% to account for the slower than expected demand recovery and the revision of the new minimum wage, as well as the introduction of mandatory foreign worker contribution to the EPF, announced recently under Budget 2025. Therefore, our TP is revised to RM1.43, pegged to a lower PE multiple of 10x FY25F EPS, reflecting the weak industry dynamics. Our Neutral call maintained.

• 2QFY24 results round up. During the quarter, net profit improved by 13.4% QoQ to RM8.6m on sustained demand and lower effective tax rate but fell by 12.9% YoY due to higher production cost. Revenue rose to RM120.9m (+9.8% YoY) driven by higher consumer demand for plastic packaging products. Pre-tax profit (PBT) margin improved marginally to RM7.3% from 7.2% in 1QFY24 despite supply chain disruption, imposition of service tax on logistic services and an increase in the newly revised service tax rate from 6% to 8%.
• 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 large interest rate cut, which fueled market optimism. While a stronger ringgit indicates economic stability, it could reduce the competitiveness of the Group's export. As the Group's export products are priced in USD, a stronger ringgit also means lower earnings when converting foreign revenues back into local currency.
• New minimum wage and mandatory foreign worker contribution to the EPF. Currently the labour cost represents about 5% of the total production costs. We estimate that the revision of the new minimum wage, along with the introduction of mandatory foreign worker contribution to the EPF that was announced recently under Budget 2025, will impact approximately 2% of the Group's annual net profit for FY25-26F.

Source: PublicInvest Research - 8 Nov 2024