SLP's 9MFY24 results disappointed due to weaker 3Q revenue and margins as the MYR strengthened during the quarter. Moreover, with higher-cost resin bought at less favourable exchange rate squeezed 3Q margins. Despite this, 9MFY24 core net profit grew 14% YoY, fuelled by stronger exports to Japan, which may persist as the year-end holiday season boosts tourism and consumption.

We cut our FY24 and FY25 earnings forecasts by 8% each, and TP by 5% to RM1.00 (from RM1.05) but maintain our OUTPERFORM call, supported by attractive dividend yields (>5%).

Below expectations. Assuming the effect of the sudden decline of MYR by 8% in 3QFY24 was reversed at revenue level, 9MFY24 revenue would have met expectations at 75% of our forecast and 71% of FY24 consensus. However, SLP's 9MFY24 core net profit of RM10m missed expectations, coming in at only 61% and 57% of our full-year forecast and the full-year consensus estimate, respectively. The key variance against our forecast came largely from lower-than-expected sales in MYR terms and cost pressure.

It declared DPS of 1.25 sen in 3QFY24, bringing cumulative YTD DPS to 3.5 sen, which appears unlikely to meet our full-year forecast. Hence, we cut our FY24 and FY25 forecast DPS by 5% and 9% to 4.75 sen and 5sen, respectively, as free cash flow yield (annualised) came in at 4.3% in 9MFY24.

9MFY24 turnover recorded a modest 1%increase to RM121m, driven by higher kitchen bags and garbage bags exports to Japan, which offset lower resin trading turnover resulting from the company's strategic decision to de-emphasize this low value-add, low-margin segment in the local market. However, group core net profit grew 14% YoY thanks to tax reinvestment allowances in 3Q.

3QFY24 core net profit declined sharply by 41% due to: (i) weak overall local and overseas demand. (ii) lower ASP, and (iii) higher resins cost acquired during weak MYR, and (iv) lower exports to other countries (- 47% QoQ). Accordingly, top line decreased 8% QoQ and YoY, while margins decreased 71% QoQ and 63% YoY.

Outlook. We expect modest recovery in demand for SLP's plastic packaging products, driven by Japanese orders as their tourism sector boosted consumption. The Japanese market accounts for 30%-40% of SLP's total plastic packaging sales, particularly in kitchen and garbage bags, due to their superior quality and adherence to sustainability standards through down-gauging technology. SLP remains committed to premium offerings, such as the fully recyclable MDO-PE film, positioning itself to capitalise on the shift toward sustainable packaging.

The utilisation rate for its MDO-PE film (fully recyclable mono film) has risen to over 30% (from 20% in 1QCY24) with more inquiries from domestic and ASEAN markets. However, we expect cost pressures from higher utility, logistics cost and minimum wages to continue, potentially weighing on margins through 4QFY24 and FY25, though these may be partially offset by labour automation and cost pass- through to customers. Furthermore, SLP continues to invest in new machinery to stay ahead of industry trends, particularly the shift towards circular packaging. The upcoming installation of a new machine from Europe, set for 4QFY24, will enhance the company's capabilities in producing flexible, sustainable packaging. This strategic investment not only supports SLP's commitment to low-carbon manufacturing but also better positions the company to capitalize on the growing demand for eco-friendly solutions, reinforcing its competitive edge in the market.

Forecasts. We cut our FY24 and FY25 net profit forecasts by 8% each, to reflect higher operation costs.

Valuations. Consequently, we reduce our DDM-derived TP by 5% to RM1.00 (from RM1.05) as we tweak our FY24 and FY25 dividend forecasts to 4.75 sen and 5.0 sen (from 5.0 sen and 5.5 sen), respectively. We believe the company is reinvesting a portion of its earnings in strategic assets like the new mono film machine. Its current net cash position stands at RM84m. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We like SLP for its: (i) product mix which focuses on high-margin, less commoditised segments 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. Maintain OUTPERFORM.

Risks to our call include: (i) an extended slowdown in the global economy, dampening consumer demand for plastic packaging, (ii) a sharp rise in resin prices, and (iii) adverse fluctuations in the foreign exchange market.

Source: Kenanga Research - 11 Nov 2024