Results Review

• SLP Resources Bhd’s 4Q2018 net profit surged slightly more than 50.0% Y.o.Y to RM7.3 mln, compared to RM4.8 mln in the previous corresponding quarter. The favorable results were mainly attributed to higher export sales and lower tax charges which offset higher depreciation expenses following the completion on the new blown film line. Revenue also grew 5.1% Y.o.Y to RM47.4 mln, from RM45.1 mln last year. The group has also declared a third interim dividend of 1.5 sen per share (YTD: 4.5 sen), payable on 5th April 2019.

• Consequently, full year net profit rose 31.4% Y.o.Y to RM25.3 mln vs. RM19.2 mln a year ago, driven by: i) higher export and local sales, ii) increased production volume, iii) lower tax expenses, and iv)a net forex gain of RM0.6 mln vs. a net forex loss of RM1.1 mln previously. Revenue, meanwhile, improved slightly to RM188.1 mln (+4.4% Y.o.Y), from RM180.7 mln in 2017.

• The full-year results came in within expectations, accounting to 105.4% and 100.5% of our forecast net profit and revenue respectively. As such, we leave our forecasts unchanged until further updates from the management in the upcoming analysts’ briefing.

• Meanwhile, SLP continues to sport a healthy balance sheet with a net cash which is expected to be well supported by resilient demand for plastic packaging products, consistent positive operating cashflows and conservative borrowing policies that could further boost its cash holding in due course to fund its capex.

Prospects

Moving forward, we believe net profit margins will to continue to improve, mainly due to increased sales volume and economies of scale, in-line with SLP’s ongoing expansion plans. The group is planning to construct the second blown film line which is expected to ramp up production volume to more than 30.0 metric tonnes a year, from 26.0 metric tonnes currently.

The group has also re-entered the sealant film category after halting the production of the film five years ago due to better pricing opportunities and to utilise idle capacity. We are positive on this as it will ensure efficient floor utilisation and lower production costs per unit.

Meanwhile, resin prices are expected to remain downward pressured amid the weaker demand during the Lunar New Year holidays and buyers holding off bulk purchasing in hopes of cheaper prices. Lower raw material cost is positive to SLP’s bottomline.

Rising operational costs (i.e.: labour, electricity) and higher depreciation expenses, however, is seen capping net profit growth to less than 10% in 2019, but it is expected to rebound strongly in 2020, mainly due to additional tax incentives with the completion of the second blown film line and slightly higher sales volumes.

Despite trade uncertainties and the slowing global economic growth phenomenon, we remain sanguine and believe that SLP will be able to withstand current volatilities as its customers are mainly made up of the consumer sector, which are more resilient to economic slowdowns. The group also has sufficient cash cushion (cash holdings: RM54.2 mln as at 31st December 2018) to maintain its ongoing business operational and expansion plans.

Valuation and Recommendation

We leave our 2019 forecasts largely unchanged and introduce our 2020 net profit and revenue assumptions of RM33.3 mln and RM239.0 mln respectively. We reiterate our HOLD recommendation on SLP Resources Bhd with an unchanged target price of RM1.30 derived from ascribing an unchanged PER of 15.0x to its FY19 EPS of 8.7 sen. Already, SLP’s mid-term growth potential is reflected in its current share price while valuation is already fair at trailing PER of 15.0x, similar to industry players average at 16.0x. The share has increased 15.0%, from our first initiation at RM1.13 in September last year, which we believe has reflected its strong prospects. 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 - 25 Feb 2019