KUALA LUMPUR (Aug 7): A few research houses have lowered their target prices (TPs) while maintaining their calls on SLP Resources Bhd after the group missed earnings expectations for the second quarter ended June 30, 2023 (2QFY2023).
Hong Leong Investment Bank (HLIB) Research has maintained its “hold” call on SLP Resources, with a lower TP of 81 sen from 89 sen previously.
The lower TP is based on 14.5 times price to earnings (P/E) on mid-FY2024 forecast earnings per share of 5.6 sen, in line with five-year historical mean P/E.
“Post-earnings adjustment, we roll over our valuation base year to mid-FY2024,” said HLIB analyst Sam Jun Kit in a research note on Monday (Aug 7).
SLP Resources’ first half of FY2023 (1HFY2023) core profit after tax of RM6.5 million fell short of HLIB's expectations at 33% of its full-year forecasts and 36% of consensus, he said.
“The lacklustre performance was mainly due to weak local and export sales, as customers slowed their orders amid inflationary pressures and concerns over economic slowdown,” said Sam.
Sam noted that after experiencing soft demand in 1QFY2023, the weakness for SLP Resources’ core products persisted in the 2QFY2023 with a utilisation rate of 47% versus 49% in the first quarter.
“The main contributing factor was sluggish demand from external markets, particularly in Japan and Europe, which was driven by the fluctuating exchange rates and concerns over an impending economic slowdown,” said Sam.
“Additionally, customers chose to hold back their orders and instead utilised their existing inventories, speculating on lower polymer prices,” he added.
Amid the lower-than-expected year-to-date utilisation rate, Sam trimmed the utilisation rate assumptions for FY2023 to 53%, FY2024 to 60% and FY2025 to 63%, resulting in core profit after taxation and minority interest falling by 21% in FY2023, 24% in FY2024 and 5% in FY2025.
Meanwhile, Kenanga Research has lowered its TP for SLP Resources by 17% to 90 sen from RM1.09, and maintained its “market perform” call.
Besides lowering its TP for the group, Kenanga Research has trimmed its earnings forecast for SLP Resources by 14% for FY2023 and 15% for FY2024.
“The adjustment also reflects the recalibration of our WACC (weighted average cost of capital) assumption to 8.1% from 7%, having updated the beta value and cost of equity,” said analyst Teh Kian Yeong.
“We maintain our FY2023-FY2024 dividend forecast of 5.5 sen,” said Teh.
Teh was also disappointed with SLP Resources’ core net profit of RM6.9 million for 1HFY2023, which makes up only 38% of both its full-year forecast and consensus estimate.
In terms of outlook, Teh expects SLP Resources’ 2HFY2023 prospects will continue to be weighed down by global economic slowdown and higher labour cost structure.
This will be offset by a decline in linear low-density polyethylene resin prices to below US$950 (RM4,327) per tonne which will boost margins in certain non-commoditised or premium products, given their stickier average selling prices.
“Our view is consistent with SLP’s guidance for a cautious outlook with only a gradual recovery by FY2024.
“It is hopeful for stronger orders for its new high-margin products, particularly its MDO-PE film, which is printer-friendly and fully recyclable.
“Over the medium to long term, the global packaging market should grow between 3% and 5% a year, driven by innovative products with higher barrier performance and greater recyclability,” said Teh.
Teh also noted that the export-dependent sector may face short-term challenges amid the ongoing economic slowdown, but local players are also well-positioned compared to overseas competitors due to cost advantages.
Meanwhile, PublicInvest Research has retained its “underperform” call on SLP Resources with an unchanged TP of 73 sen, and kept its estimates unchanged.
Analyst Denny Oh said SLP Resources’ results for the quarter were below its expectations at 39.9% of full-year estimates and consensus at 36.1%.
SLP Resources’ 2Q net profit fell 60.64% year-on-year to RM3.49 million from RM8.86 million due to lower revenue and the absence of a gain from the disposal of a land parcel. Revenue declined 20.05% to RM37.63 million from RM47.07 million a year earlier due to softening demand from local and regional markets.
“Outlook for the flexible plastic packaging industry continues to be weighed by weak global demand,” said Oh.
“While raw material and logistic costs have eased, oversupply and weak external demand remain prevalent due to the slowing global economic activities and lack of market catalyst to spur demand growth,” he added.
Oh said the group nonetheless remained focused on its product range differentiation to sustain its market shares, while strengthening its financial fundamentals.
“The group’s premium flexible packaging products for the circular economy is gaining traction; however, contribution from this new product to its bottom line remains negligible at this juncture,” he said.
At the time of writing, SLP Resources’ shares fell 1.5 sen or 1.72% to 85.5 sen, with a market capitalisation of RM271 million.