Kenanga Research said SLP's growth will likely be supported by its product mix.
PETALING JAYA: The global economic slowdown continues to weigh on the outlook for the plastic packaging industry and players are expected to see a muted second half of 2023 (2H23) despite 2H traditionally being the peak season.
Kenanga Research said SLP Resources Bhd
’s growth will likely be supported by its product mix which focuses on high-margin, non-commoditised products such as kangaroo pouches and mono films, as well as its robust cash flows and a strong balance sheet with a net cash position, enabling consistent and generous dividend payments.
“Its nine months for financial year 2023’s (9M23) core net profit of RM8.7mil missed expectations, coming in at only 64% of our full-year forecast (despite our recent 9% downgrade) and 58% of the full-year consensus estimate.
“The key variance against our forecast came from the double whammy of lower-than-expected sales and cost pressure,” the research house said in a report yesterday.
Weaker exports (including to Japan and Australia) and a reduced average selling price resulting from lower resin prices and heightened competition led to a 14% year-on-year (y-o-y) decline for the group’s 9M23 turnover. SLP Resources’ net profit fell by 38% y-o-y on reduced margins from higher utility costs and poorer cost absorption from lower plant utilisation.
“SLP Resources is stepping up its marketing efforts in South-East Asia. It is hoping to sign up a new Thai customer specialising in pet food packaging, particularly for its high-margin, fully recyclable MDO-PE film.
“Additionally, it has garnered significant interest through a regional circular-packaging seminar co-hosted with a raw-material supplier in August 2023, promoting sustainable packaging such as its MDO-PE film.
“It has received inquiries but it takes time for these to eventually translate to actual sales,” Kenanga Research said.
Kenanga Research maintained a “market perform” call with a target price of 85 sen for the company.
The risks to its call are a prolonged global economic downturn leading to weak consumer demand for plastic packaging, a sharp rise in resin prices, and adverse foreign-exchange fluctuations.
Meanwhile, Hong Leong Investment Bank Research, which maintained a “hold” call for SLP Resources with a target price of 78 sen, said management had indicated that ongoing weak demand in export markets is expected to persist.
The upcoming year-end sales boost is likely to have a minimal impact. The research house said overall, the outlook for the group’s product sales at present remains lukewarm.
“Notably, Japan, which has traditionally been SLP Resources’ primary export market and a key contributor to the group’s fiscal performance prior to the pandemic, continues to grapple with tepid demand for core products such as kitchen and rubbish bags.
“On the MDO-PE film front, despite ongoing positive inquiries, sales are expected to be tepid due to weak demand from end-customers. On a positive note, sales volume of kangaroo pouches experienced a significant surge after the brand owner expanded production capacity adjacent to SLP Resources’ factory in Kedah back in May.
“However, it is worth noting that the sales from kangaroo pouches are unlikely to offset the impact of weak core-product sales,” the research house said in a report yesterday.
