Highlights

• SLP Resources Bhd (SLP) is planning to launch eco-friendly flexible packaging products, in-tandem with rising demand due to increasing scrutiny on MNCs to reduce their environmental footprint. According to a report from Markets and Markets, the biodegradable plastics market is expected to grow at a CAGR of 15.1% to US$6.12 bln by 2023, from US$3.02 bln last year.

• To address a growing need for a more sustainable and cheaper packaging solution, the group has introduced a new type of high-quality laminated polyethylene plastic (NPE) that can be recycled. The new material is more cost-effective compared to the existing material used and is scheduled to be introduced in the Indochina markets by May this year.

• Other products include oriented polyethylene (OPE) films that are making a comeback due to rising environmental awareness. To recap, the OPE films were initially launched more than ten years ago but was not well-received then due to pricing issues. We look forward to potentially higher usage of the material in the F&B sector amid increasing efforts by MNCs to reduce plastic waste or pursue zero waste.

• Meanwhile, the group is also expected to re-enter the shariah list after it exited the category due to high cash reserves in November 2018. Downgrade to HOLD (from Buy) with an unchanged target price of RM1.30 as the share price has fairly reflected SLP’s near-term growth prospects.

Prospects

The group has introduced a NPE film that could be used in the fin seal packaging process, replacing its laminated counterpart that cannot be recycled. The new film is also more cost-friendly to its users due to lower raw material requirements and is expected to be launched in Indochina by May this year by a major regional hygiene company.

Further, SLP is also expecting renewed demand for its OPE film as companies strives to meet sustainability targets. Although, OPE was initially launched more than ten years ago, the demand for this film has been weak due to pricing issues. In layman terms, the substitution of the OPE in packaging will enable the reduction or elimination of nonrecyclable materials, achieving a packaging with all PE structure thus, making it more convenient for recycling. We noted that there is a potential for OPE application in the F&B segment, which could see a partnership with another converter to enter the aforementioned segment.

We think that there is a rising pressure for MNCs to step-up their green credentials as the new era consumers become increasingly concern about environmental degradation. We could be near a pivotal point where plastic converters are motivated to provide a more environmentally-friendly and sustainable solution to their packaging partners. This scenario is vastly different from the scene a few years back where customers seek lower cost products despite higher environmental damage, in exchange for affordability.

Although we agree that a mass shift to biodegradable products is not immediate, mainly due to higher costs involved, which is about four-fold higher than other non-degradable products and the lack of supporting infrastructures to support the recycling/composting of bio-degradable products, we anticipate a steady, but slow growth in the demand for eco-friendly products in the market.

An example of giant MNCs shifting towards reducing their negative environmental impact is Nestle which is committed to make 100% of its packaging recyclable or reusable by 2025.

Subsequently, the group has allocated about RM11.0 mln to expand its operations which includes a new blown film line and five converter lines. On the heels of the first blown film line, the second blown film line is expected to commence production by end- 2019.

SLP also aims to achieve a higher revenue contribution from the personal care and hygiene segment, targeting about 8.0% of total group revenue in 2019 (YTD: 3.0%) after securing new customers for its breathable film product and the introduction of its ecofriendly products. We foresee a strong double-digit growth in both revenue and net profit, with bottomline margins ranging from 13.0%-14.0%, helped better product mix and potential tax savings.

We also note that the group will be included in the shariah list again after its temporary exclusion last year due to high cash reserves, which exceeded the shariah-compliant requirements.

In addition, SLP has re-entered the sealant film category after a five-year hiatus, following slightly improved pricing opportunities, on the back of ongoing market consolidation (Scientex has about 90.0% of market share in sealant film). However, we note that contribution from sealant film sales will remain negligible - only as a means to utilise spare capacity, if any, as its margins is incomparable to the other higher

Valuation and Recommendation

Despite maintaining a positive growth outlook for SLP Resources Bhd, we downgrade our call on the group to a HOLD (from Buy) with an unchanged target price of RM1.30 derived from ascribing an unchanged PER of 15.0x to its FY19 EPS of 8.8 sen, following the recent run-up in its share price. Notably, SLP is trading at a forward PER of 14.5x compared to industry mean of 15.0x, indicating limited upside at the current juncture. 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 - 3 May 2019