We understand that SLP’s exports of kitchen bags and garbage bags, primarily to Japan, have improved by c.20% YoY in terms of volume. It is also close to securing a new buyer for its machine direction-oriented PE (MDO-PE) film. It is investing RM10m in a third MDO-PE film line which will boost its production capacity by >60%. We maintain our forecasts, TP of RM0.96 and MARKET PERFORM call.

We came away from a recent engagement with SLP feeling slightly upbeat on its outlook. The key takeaways are as follows:

1. Exports to Japan picked up. We understand that SLP’s exports of kitchen bags and garbage bags, primarily to Japan, have improved by c.20% YoY in terms of volume. This is on the back of a vibrant leisure and hospitality sector on a tourism boom in Japan backed by a weak Japanese Yen. Nonetheless, the numbers are still shy of prepandemic levels. In FY22, kitchen bags and garbage bags constituted 20% and 10% of SLP’s total revenue, respectively. On a less encouraging note, the broader outlook for all products remains clouded by a sluggish global demand, exacerbated by heightened geo-political tensions.

2. Close to securing a new buyer for its MDO-PE film. We understand that SLP is close to securing a new buyer for its MDO-PE film, i.e. a Vietnam-based exporter of frozen food to Europe. This is one of the many tell-tale signs that SLP’s fully recyclable MDO-PE film is gaining traction, especially, from domestic and ASEAN converters catering to the European market, as exporters to Europe rush to comply with the European Packaging and Packaging Waste Directive (94/62/EC), which requires that by end-2025, at least 65% by weight of all packaging waste (comprising paper, cardboard, plastic and glass) must be recyclable, with a specific target of 50% for plastic waste. Being a first mover in the production of MDO-PE film in the region, it faces limited competition at present.

3. Investing in a third MDO-PE film line. SLP is investing RM10m in a third MDO-PE film line with a nameplate capacity of 230 tonnes/month. Upon commissioning by Oct 2024, this new line will raise its MDO-PE film nameplate capacity by >60% to 600 tonnes/month. The new investment will also boost economies of scale and serve as a buffer against downtime at the existing lines.

Forecasts. Maintained.

Valuations. We also maintain our DDM-derived TP of RM0.96 (CAPM: 7.8%, TG: 2%). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see page 5).

We like SLP for its: (i) product mix which focuses on high-margin, noncommoditized products such as kangaroo pouches and mono films, and (ii) robust cash flows and a strong balance sheet (a net cash position), enabling consistent and generous dividend payments. However, we are concerned over an extended slowdown in the global economy which will weigh down on SLP’s earnings. Reiterate MARKET PERFORM.

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 - 7 Feb 2024