Results Review

• SLP Resources Bhd’s (SLP) 3Q2019 net profit fell 9.1% Y.o.Y to RM5.7 mln against RM6.2 mln last year, in-tandem with the weaker revenue of RM42.6 mln (-18.3% Y.o.Y), from RM52.2 mln in the same period last year, mainly due to weaker ASPs and sales volume. Even so, the group has declared a third interim dividend of 1.5 sen per share, payable on 8th January 2020.

• On a cumulative basis, 9M2019 net profit declined marginally to RM17.3 mln (-3.6% Y.o.Y), from RM18.0 mln, due to the aforementioned reasons, while revenue lost 8.4% Y.o.Y to RM128.9 mln, from RM140.7 mln in the last corresponding period. The latest earnings underperformed our estimates, only contributing about 66.6% and 71.1% our previous full-year net profit and revenue forecasts of RM26.0 mln and RM181.4 mln respectively, weighed down by weaker-than-expected selling prices of SLP’s flexible packaging products.

• Consequently, we trimmed our FY19-FY20 net profit by 3.9%-7.7% to RM24.0 mlnRM26.4 mln, on the basis on lower ASPs and weaker floor utilisation, albeit we tweaked margins slightly higher to account for lower resin prices. Revenue, meanwhile, was adjusted to RM174.1 mln (-4.0%) and RM179.6 mln (-4.1%) for 2019 and 2020 respectively

Prospects

We think SLP will continue to keep ASPs at current levels in the near-term, if not lower, in order to maintain its competitiveness; resulting in a potential downside pressure to turnover. Although EBITDA margin is expected to improve, bottomline margin is foreseen to grow at a slower pace, despite lower raw material prices due to increased depreciation following the installation of new machineries in 2019 and higher taxes.

Meanwhile, we forecast ASPs to grow at less than 5.0% next year as we continue to see weak business sentiments with buyers adopting a wait-and-see approach; holding off large purchases amid falling polymer prices. Moving forward, earnings growth will largely depend on contribution from export sales and stronger sales volumes as new capacity comes online.

Giant household product label Unilever has promised to halve its usage of newly made plastic by 2025 as the industry grapples with growing criticism of unsustainable throwaway packaging. This rising awareness of environmental sustainability could improve the demand for SLP’s eco-friendly flexible packaging products, albeit mass plastic reduction is still far in the future due to the significantly higher premium of ecofriendly/renewable plastics.

Valuation and Recommendation

We keep our HOLD recommendation on SLP but with a lower target price of RM1.25 (from RM1.30) as we foresee the tough operating environment to persist in FY20, on the back of rising labour costs, slowing global growth and shaky trade relations.

Our target price is based on an unchanged target PER of 15.0x to our 2020 EPS of 8.3 sen, while the assigned PER is also 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 - 11 Nov 2019