KUALA LUMPUR: SLP Resources Bhd is poised to see a modest earnings recovery driven by stimulus and more moderate inflation in its key market, Japan.
Notably, Japan contributed RM31.3 million or 38 per cent to the group's total revenue in the first half of 2024 (1H24).
However, Public Investment Bank Bhd (PublicInvest Research) pointed out that a stronger ringgit and possibly a higher minimum wage could limit the recovery, putting pressure on the margin and diminishing the competitiveness of its exports.
"The ringgit climbed to a 30-month high of 4.1 against the US dollar in September, buoyed by the US Federal Reserve's unexpectedly larger interest rate cut, which fuelled market optimism.
"While a stronger ringgit indicates economic stability, it could reduce the competitiveness of the group's exports," it said in a note.
It added that with the announcement of the minimum salary for civil servants already adjusted to above RM2,000, the government is being urged to increase the current minimum wage of RM1,500 in the upcoming Budget 2025 announcement tomorrow.
If implemented, this could further strain the margins of SLP Resources, which are already under pressure from the intense competition.
On the outlook, PublicInvest Research said the flexible plastic packaging industry continues to grapple with a supply-demand imbalance and elevated production costs.
Despite these headwinds, there are signs of gradual improvement in the operating environment and demand recovery.
"Demand is expected to strengthen and be supported by resilient domestic consumption and rising tourism. The group has allocated RM6 million to increase production capacity, aiming to penetrate new markets and improve production efficiency.
"A new machine purchased from Europe is scheduled to be installed and commissioned by the fourth quarter of this year," it added.
The firm maintained a "neutral" call on the stock with an unchanged target price of 86 sen.