Kenanga Research feels slightly upbeat on SLP Resources Bhd’s outlook as its exports to Japan has picked up and it is close to securing a new buyer for its machine direction-oriented polyethylene (MDO-PE) film.
“It is also investing RM10 million in a third MDO-PE film line which will boost its production capacity by more than 60%,” it said in its Company Update today (Feb 7).
The research house maintained its forecasts, MARKET PERFORM call and dividend discount model (DDM)-derived target price (TP) of RM0.96, with capital asset pricing model (CAPM) of 7.8%, terminal growth (TG) of 2%.
“There is no adjustment to our TP based on environmental, social, and governance (ESG) given a 3-star rating as appraised by us,” it said.
As mentioned, Kenanga said it feels upbeat after engagement with SLP recently due to three reasons.
Firstly, it said the group’s exports of kitchen bags and garbage bags, primarily to Japan, have picked up.
“It has improved by 20% year-on-year (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 pre-pandemic 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,” it said.
Besides that, the research house said post-engagement, it understand that SLP is close to securing a new buyer for its MDO-PE film, 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.
“The traction was due to exporters to Europe rush to comply with the European Packaging and Packaging Waste Directive (94/62/EC).
The directive requires that by the end of 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,” it said.
Lastly, Kenanga said SLP is investing RM10 million in a third MDO-PE film line with a nameplate capacity of 230 tonnes per month.
“Upon commissioning by October 2024, this new line will raise its MDO-PE film nameplate capacity by more than 60% to 600 tonnes per month.
“The new investment will also boost economies of scale and serve as a buffer against downtime at the existing lines,” it said.
It like SLP for its product mix which focuses on high-margin, non-commoditized products such as kangaroo pouches and mono films, and robust cash flows as well as a strong balance sheet.
“However, we are concerned over an extended slowdown in the global economy which will weigh down on SLP’s earning,” the research house added.
The risks to Kenanga’s call include a prolonged global economic downturn, a sharp rise in resin prices, and adverse fluctuations in the foreign exchange market.
