Results Review

• SLP Resources Bhd’s (SLP) 3Q2018 net profit rose 32.1% Y.o.Y to RM6.2 mln, from RM4.7 mln in the previous corresponding quarter, owing to a higher turnover volume and margins due to firmer economies of scale. Revenue was also higher at RM52.2 mln (+13.8% Y.o.Y), from RM45.9 mln last year.

• Cumulatively 9M2018 net profit jumped 24.6% Y.o.Y to RM18.0 mln, from RM14.4 mln in the same period a year ago, lifted by the improvements in local and export sales as well as higher production volume. Revenue, meanwhile, grew 4.2% Y.o.Y to RM140.7 mln vs. RM135.1 mln in 9M2017.

• The group’s 9M2018 earnings came below our expectations, accounting to 65.6% of our previous full year estimated net profit of RM27.4 mln, while revenue was short of RM12.1 mln (or 5.9%) of our last full-year revenue forecast of RM203.8 mln. The difference was mainly due to lower-than-expected sales and a slight variation in our tax assumptions.

• Nevertheless, we think that SLP is still on-track to achieve strong growth in both its topline and bottomline, driven by strong financial metrics (five-year net profit CAGR of 17.9%), increasing production capacity, resilient demand and attractive margins due to its product differentiation strategies.

• We maintain our BUY recommendation on SLP Resources Bhd, but with a lower target price of RM1.05 (from RM1.55 previously) by ascribing an unchanged target PER of 12.0x to its forecast FY19 EPS of 8.7 sen, as we remain positive on SLP’s strong financial metrics, underpinned by consistent bottomline growth and double-digit margins as well as a solid balance sheet (net cash position).

Prospects

The group has successfully commissioned one-of-the two blown-film extrusion lines at end-April, which has contributed to higher production volumes, while the second line should be on-track for construction in 4Q2019. Both lines are expected to increase capacity by 640 tonnes per month upon completion. Meanwhile, its production utilisation is envisaged to remain around 70.0% -73.0% in 4Q2018, indicating still strong demand.

We expect contribution from the hygiene segment to remain negligible for now, due to the higher price tag of its healthcare packaging products exported to China. Consequently, total turnover will continue to be anchored by the F&B and consumer goods segment, where demand is expected to be resilient.

Meanwhile, uncertainties arising from the ongoing U.S.-China trade conflict will remain prevalent, leading to price volatilities of major feedstock like resins as well as forex in the near-term. Even so, we believe that SLP’s attractive margins will provide some support to buffer against the potentially higher costs compared to the other pure-play plastic manufacturers.

Valuation and Recommendation

We trimmed our FY18-FY19 net profit estimates by 12.6% and 9.7% respectively after adopting a more conservative forecast on ASPs and slightly higher tax expense assumptions. Revenue, meanwhile, was also lowered to RM187.2 (-8.1%) and RM212.5 (-6.6%) over the same period respectively.

We maintain our BUY recommendation on SLP Resources Bhd, albeit with a lower target price of RM1.05 (from RM1.55 previously) by ascribing an unchanged target PER of 12.0x to its forecast FY19 EPS of 8.7 sen (from 9.7 sen previously), as we remain positive on SLP’s strong financial metrics, underpinned by its consistent bottomline growth and double-digit margins as well as a solid balance sheet.

We think SLP valuations are undemanding, following the lackluster share price performance in the recent months, despite its still strong earnings momentum. The assigned PER is notably higher than its closest peer, Thong Guan Industries Bhd which we think is justifiable due to SLP’s stronger growth prospects and superior double-digit margins.

Source: Mplus Research - 5 Nov 2018