Results Review

• SLP Resources Bhd’s (SLP) 2Q2019 net profit came in flat at RM6.5 mln (-0.9% Y.o.Y), from RM6.6 mln previously as domestic sales remained weak. 2Q2019 revenue also fell marginally by 2.6% Y.o.Y to RM43.2 mln, from RM44.4 mln a year earlier. The group declared a second interim dividend of1.5 sen a share, bringing YTD dividend per share to 2.5 sen. The latest dividend declared is payable on 4th October 2019.

• Cumulative 1H2019 net profit traced the quarterly earnings with minimal change at RM11.7 mln (-0.6% Y.o.Y), compared to RM11.8 mln in the same period last year, while revenue narrowed by 2.5% Y.o.Y to RM86.3 mln, from RM88.5 mln last year. The latest earnings were below our expectations, accounting for 41.7% of our previous full-year forecast of RM28.0 mln, while revenue made up about 40.5% of our estimated full-year revenue.

• Although 1H2019 is typically lower compared to 2H2019, revenue was weaker-thanexpected, hence we trim our FY19-FY20 revenue forecast by 14.8%-21.4% respectively, while earnings estimates for FY19 and FY20 was lowered by 7.1% and 19.1% respectively after accounting for the persistently weak domestic demand, albeit we foresee higher margins due to better product mix and lower raw materials prices.

Prospects

Moving forward, we foresee resin prices to be favorable for plastic converters like SLP amid the ongoing trade tension between the U.S. and China, in addition to softening global economic growth dampening demand. Stable and controlled resin prices will provide some form of respite for SLP, albeit cost pressures will still come from rising utility as well as higher labour costs. Lower raw material costs for plastic packaging materials will also help SLP to maintain a competitive price advantage. According to a report from Mordor Intelligence, the flexible packaging market, valued at US$231.0 bln in 2017, is expected to reach a value of US$292.0 bln by 2023 at a compounded annual growth rate of 3.9% over 2018-2023, indicating reasonable demand growth.

Meanwhile, domestic demand remained weak, accounting for 39.6% of total revenue sales, down from 41.5% previously. Hence, key topline and bottomline drivers are expected to be driven by i.) higher export sales, and ii.) weak resin prices.

In-house innovation could open new avenues or markets for SLP like its sustainable packaging materials, which will also allow for higher margins.

Valuation and Recommendation

Although we believe the group will demonstrate longer-term improvement, we maintain our HOLD recommendation on the group with an unchanged target price of RM1.30 after rolling forward our base year to FY20 as global demand remain tampered by trade uncertainties and rising advocacy against plastic pollution. Our target price is based on an unchanged target PER of 15.0x to our 2020 EPS of 8.7 sen, while the assigned PER is also notably higher than its closest peer, Thong Guan Industries Bhd, we think is justifiable due to SLP’s stronger growth prospects and superior double-digit margins.

Source: Mplus Research - 5 Aug 2019