KUALA LUMPUR (May 6): Analysts have raised their earnings forecasts and target prices (TPs) for plastic packaging maker SLP Resources Bhd, after the group's latest financial results beat their expectations due to improved product mix and higher output.
In a research note on Monday, Hong Leong Investment Bank (HLIB) revised its earnings forecast upwards by 12% for FY2027 and 11% for FY2025, following adjustments to its utilisation rate assumptions to 58% and 60%.
Despite SLP's strong start to FY2024, the research house cautions that a notable risk is the ongoing strength of the US dollar against the Japanese yen, which could slow down Japanese sales.
"The increasing likelihood of a 'further and fewer' anticipated rate cut from the Fed [Federal Reserve], driven by sticky inflation in the economy, may lead to a prolonged period of a strong USD, thereby weighing on the group’s sales recovery prospects," it said.
Additionally, HLIB noted that disruptions in the raw materials supply chain due to the Red Sea conflict and Panama Canal drought are driving up logistic costs, potentially hindering the group's ability to transfer these expenses to customers amid weakened demand.
Thus, HLIB maintains its "sell" call on the stock with a higher TP of 83 sen (from 74 sen).
Separately, Kenanga Research expects continuous demand growth for SLP's plastic packaging, driven by strong sales in Japan fuelled by the expanding tourism sector, which is influenced by a weakened yen, leading to increased demand for SLP's kitchen and garbage bags in the Japanese market.
The research house added that the new MDO-PE film machine, set to be operational by October 2024, will boost production capacity by over 60% to 600 tonnes/month. By the end of 2024, MDO-PE production is expected to constitute about 25% of its total capacity.
Thus, Kenanga raised its earnings forecast by 13% for FY2024 and 12% for FY2025 to reflect better margins while keeping its "underperform" call for the stock and raising its TP by 10% to RM1.16 (from RM1.06).
PublicInvest, meanwhile, keeps its forecast unchanged and retains its "underperform" call with a higher target price of 86 sen, noting that the flexible plastic packaging industry outlook is still challenged by global supply-demand imbalance.
"The group’s newly developed packaging products have gained favourable responses from clients and are expected to break into new markets. However, earnings contribution from this new product is not likely to be meaningful at this juncture," it added.
SLP Resources Bhd reported a net profit of RM4.94 million for the three months ended March 31, 2024 (1QFY2024), compared with RM3.03 million over the same period last year. Revenue for the quarter inched up 1.32% year-on-year to RM40.8 million from RM40.27 million a year earlier.
According to Bloomberg, the consensus 12-month target price for the stock is 95 sen.
SLP's shares traded three sen or 2.75% lower at RM1.06 in Monday morning trading session, valuing the group at RM335.98 million. Year to date, the stock has rallied by 17.78%.