SLP remains positive on the Japanese market (kitchen bags and garbage bags). Although it is encountering some challenges in Thailand, its first shipment to Vietnam is en route.
Kenanga Investment Bank (Kenanga) said today (May 10) cited slight price cuts in response to competition are cushioned by improved economies of scale from the higher sales volumes. Kenanga maintains their forecasts, TP of RM1.16 and OUTPERFORM call.
Kenanga said key takeaways from a post-results engagement with SLP were:
1. Kitchen and garbage bags continued to shine. SLP has seen a surge in orders for its kitchen bags and garbage bags (primarily sold to Japan) since Dec 2023. Some of its existing Japanese customers which had turned to alternative suppliers are now returning to SLP, given the better quality of its products. SLP’s key strengths are: (i) product quality underpinned by technical capabilities, especially in downgauging (i.e. making films thinner), and (ii) the elevated production cost in Japan making production of PE bags locally not commercially viable. In 1QFY24, Japan accounted for 38% of SLP’s total sales, up from 29% in FY23.
2. Rising prominence of manufacturing vs. trading. It guided for its manufacturing sales (excluding resin trading) to grow by 30% YoY in FY24 on the back of increase in its utilisation rate to 60%-65% vs. 50% in FY23. This compares with a projected 20%-25% decline in its trading turnover, resulting in its high-margin manufacturing operations becoming even more prominent vs. the low-margin trading business. Already, in 1QFY24, manufacturing contributed 71% to its total revenue (FY23: 62%).
3. Lower ASP offset by higher volumes. In response to the intense market competition, SLP has lowered its ASP by <5% to maintain competitiveness to defend its market share. However, it will be able to maintain its margins given better economies of scale from higher sales volumes.
4. Challenges in Thailand but promising outlook in Vietnam. SLP is unable to significantly grow orders for its fully recyclable machine direction-oriented PE (MDO-PE) film in Thailand due to Thai Baht’s weakness against the USD (SLP’s products are priced in USD), prompting users in Thailand to source their packaging materials locally. On a brighter note, the delivery of its first batch of MDO-PE film to Vietnam will start in Jun 2024. It will go to three converters (5MT each), facilitated by a newly appointed Vietnamese agent specialising in film sales (instead of its Japanese agent in the market
Kenanga likes SLP for its: (i) product mix which focuses on high-margin, non-commoditised products 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.
