Results Review

• SLP Resources Bhd’s (SLP) 4Q2019 net profit almost halved to RM3.9 mln, from RM7.3 mln earlier, weighed down by lower sales volume and also ASPs. Quarterly revenue, meanwhile, narrowed 19.9% Y.o.Y to RM37.9 mln, from RM47.4 mln in the last corresponding year. Even so, the group has declared a fourth interim dividend of 1.5 sen per share, payable on 10th April, 2020. The group’s total dividend payout for the year stood at 5.5 sen vs 4.5 sen in 2018.

• Full-year net profit also fell 16.0% Y.o.Y to RM21.2 mln, from RM25.3 mln last year due to the aforementioned reasons, while revenue trimmed 11.3% Y.o.Y to RM166.8 mln, from RM188.1 mln previously. The latest earnings came below our expected forecast of RM 24.0 mln due to weaker-than-expected margins and floor utilisation, while the actual tax rate was higher than our estimated percentage.

• Following the weaker performance in 2019, we trimmed our 2020 forecast earnings and revenue to RM23.3 mln (-11.7%) and RM173.1 mln (-3.6%) respectively, mostly to account for weaker sales volumes this year amid the coronavirus epidemic that is spreading globally. We also introduce our 2021 estimated net profit and revenue at RM24.9 mln and RM185.4 mln respectively.

Prospects

Moving forward, we expect to see a marginal improvement in 1Q2020 net profit, helped by increased capacity. Sales per unit, however, is expected to remain flattish, in-tandem with subdued resin prices.

We also expect Japan and Malaysia, which contributed the bulk of SLP’s total revenue last year, accounting for about 42% and 40% respectively, to remain as the key revenue driver this year. According to Wood Mackenzie, flexible packaging demand in Asia slowed down to 4.8% last year, compared to 5.6% in 2018. Even so, Asia is still expected to contribute about half of the global demand for flexible packaging within the next five years.

Although we remain cautious of the increasing risk of weaker demand for flexible packaging products as the coronavirus intensifies in the coming months, we believe that the outbreak is unlikely to hit long-term flexible packaging trends across Asia, due to resilient consumer demand.

Valuation and Recommendation

We keep our HOLD recommendation on SLP but with a lower target price of RM1.10 (from RM1.25) due to expectations of flat ASPs growth, limited earnings upsides in the near-term and rising uncertainties due to the Covid-19 outbreak.

Our target price is based on an unchanged target PER of 15.0x to our 2020 EPS of 7.4sen, 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 superior double-digit margins and proven track record.

Source: Mplus Research - 28 Feb 2020