SLP earnings face pressure from labour shortage

Kenanga Research has downgraded its call on SLP Resources to “market perform”, with a lower target price of 92 sen.

KUALA LUMPUR: Kenanga Research says SLP Resources Bhd continues to suffer from persistent lower sales volumes due to low production on the back of a labour shortage.

With this, Kenanga Research has downgraded its call on SLP Resources to “market perform”, with a lower target price of 92 sen.

“We believe SLP’s operations will not immediately return to optimum levels on the back of a persistent labour shortage.

“The recruitment of foreign labour will likely turn out to be a long-drawn affair given that it involves government-to-government negotiations,” Kenanga Research added in a fresh report on SLP Resources yesterday.

It noted that SLP’s reliance on foreign workers remains significant in the medium term, although it has embarked on an automation drive.

The research outfit has also cut SLP’s earnings forecasts by 22% and 15% for financial year ending Dec 31, 2022 (FY22) and FY23 estimates.

Kenanga Research said the packaging manufacturer’s core profit of RM8.7mil for the first half ended June 30, 2022 missed its expectations at only 39% of its full-year forecast.

SLP Resources core net profit contracted by 17% year-on-year (y-o-y) on dis-economies of scale on the back of a lower utilisation rate, coupled with higher labour costs due to higher statutory minimum wages of RM1,500 per month. The group’s turnover, however, grew 5.7% y-o-y.

“Higher average selling prices were partially offset by weaker sales volumes on lower production,” said Kenanga Research.

The research house expects the group to face labour shortages in the short-run, partially mitigated by a slight easing in cost pressures on softening resin prices.

On a positive note, Kenanga Research pointed out that resin prices have come down by around 15% to 20% to about US$1,280 per tonne (RM5,710) from the peak in April 2022.

Kenanga Research believes the softening resin prices should boost margins of certain non-commoditised or premium products.

It anticipates resin prices to weaken further in the second half of this year as there is significant new resin manufacturing capacity coming onstream and there is weak demand from China.

The reseach firm’s valuation of 92 sen (from 99 sen) is based on 13 times price-to-earnings ratio (PER) and at a 30% premium to its peers average forward PER of 10 times.

This was done to reflect SLP’s product mix that is skewed towards high-margin premium products as well as its strong balance sheet in a net cash position and a higher dividend yield of more than 6%.

“There is no adjustment to our target price based on environmental, social and governance criteria, given a three-star rating as appraised by us,” said Kenanga Research.

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