Company Update

• SLP Resources Bhd’s (SLP) plans to ship flexible plastic packaging materials to meet the demands of the 2020 Tokyo Olympics may be disrupted because of the novel coronavirus (Covid-19) outbreak.

• The group was producing 500 tonnes of plastic flexible packaging materials for the 2020 Tokyo Olympics market – representing close to 3.0% of the group’s production output in 2019. The shipment was expected in June 2020 and the cargo should have arrived on schedule in July 2020, but the outbreak of Covid-19 may see venue being changed.

• On the supply side, resin prices have turned higher, ranging at the US$850 per tonne as of late vs. approximately US$750 per tonne recorded in late-2019 (See Appendix 1). This bodes well for SLP as the low price of resin may see customers continue to delay their orders, wait for further opportunity to lock in purchases at lower prices.

• Elsewhere, the recent strength in U.S. Dollar against the Ringgit also bodes well for SLP with majority of the sales are exported to overseas, mainly to Japan and Australia.

• At the same time we reckon that demand for the flexible packing market will remain upbeat over the long term in view of the supply chain disruptions, particularly amongst Asia countries. Hence, expect short-term weakness, with recovery over the longer term

Valuation and Recommendation

We keep our HOLD recommendation on SLP but with a lower target price of RM1.09 (from RM1.10) to account for the potential delays in shipments for the Tokyo Olympics 2020 orders as well as existing orders from Japan.

Our target price is based on an unchanged target PER of 15.0x to our revised 2020 EPS of 7.3 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 superior double-digit margins and proven track record.

Risks to our recommendation include the volatility in the global resin prices which would increase production costs and compress margins. Resin prices generally move in-tandem with feedstock prices - crude oil prices, in addition to the market’s supplydemand dynamics. Manpower shortages or unexpected rise in minimum wages remain as a key concern which could result in production delays and additional costs. SLP is also exposed to foreign exchange fluctuation risk although net forex exposure in U.S. Dollars is capped to about 5.0% as raw material costs and is largely offset by export sales denominated in the same currency (approximately 60.0% of total export revenue).

Source: Mplus Research - 4 Mar 2020