Strong US dollar weighing on SLP recovery

Strong US dollar weighing on SLP recovery
Strong US dollar weighing on SLP recovery

PETALING JAYA: Although SLP Resources Bhd started the financial year 2024 (FY24) on a strong note, there are lingering risks that could impact its sales and recovery prospects.

Hong Leong Investment Bank (HLIB) said research one noteworthy risk that could slow down the company’s Japanese sales is the persistently strong US dollar against the Japanese yen, as to date the US dollar-yen exchange rate stands at 149.8 versus FY23’s 140.5.

“The increasing likelihood of a further and fewer anticipated rate cut from the US Federal Reserve (Fed), driven by sticky inflation in the economy, may lead to a prolonged period of a strong US dollar, thereby weighing on the group’s sales recovery prospects.

“Additionally, the Red Sea conflict and recurring drought in the Panama Canal have disrupted the group’s raw materials supply chain, resulting in upward pressure on logistic costs.

“We believe that the increased costs resulting from these events are unlikely to be fully passed on to customers, given the subdued demand sentiment in its major export market,” it noted.

On a positive note, the research house said the group’s MDO-PE film (fully recyclable mono film) continues to attract encouraging inquiries, and it remains optimistic about the sales prospect of the product amid the growing emphasis on “design for recycling.”

HLIB Research said it is increasing its earnings estimates for FY24 and FY25 by 12% and 11%, respectively, following adjustments to the brokerage’s utilization rate assumptions to 58% (from 55%) and 60% (from 57%).

The research firm is maintaining its “sell” call on the stock with a higher target price of RM0.83.

SLP is engaged in the manufacturing of flexible plastic packaging products, plastic films and other related products.

It provides plastic packaging bags and films for the industrial, household, retail, food and beverages, healthcare and chemical sectors.

Spelling a bullish outlook, Kenanga Research said it expects sustained recovery in demand for the company’s plastic packaging products, especially with a strong offtake from the Japanese market, resulting in higher production, utilization and hence operational efficiency.

A booming tourism industry in Japan on the back of a weak yen is boosting demand for SLP’s kitchen bags and garbage bags in that market, it noted.

“We raise our FY24 and FY25 earnings forecasts by 13% and 12%, respectively, to reflect better margins,” he said, adding that it is maintaining its FY24 dividend forecast of six sen, backed by its strong net cash position of RM87mil.

For its first quarter ended March 31, 2024, SLP’s net profit rose to RM4.94mil from RM3.03mil in the previous corresponding period, while revenue was flat at RM40.80mil against RM40.27mil previously.

In a filing with Bursa Malaysia on its first quarter performance, SLP said it will continue to adopt a prudent and cautious approach on its outlook development’ while remaining agile and alert in making swift and timely decisions and forming strategies to adapt to an unpredictable and volatile business environment.

“With a robust and healthy financial fundamentals, we are cautiously optimistic of our financial performances for FY24,” he said.

The group said it is mindful that the overall economic ecosystem is still filled with challenges, such as inflationary factors and rising geopolitical tensions, among others.

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