Results Review

• SLP Resources Bhd’s (SLP) 1Q2020 net profit slipped 23.2% Y.o.Y to RM4.0 mln, weighed down by lower sales volume for export markets, particularly Japan and European countries. Revenue for the quarter decreased 20.8% Y.o.Y to RM34.1 mln. Even so, the group has declared a first interim dividend of 1.0 sen per share, payable on 3rd July 2020. This also represents a dividend pay-out ratio of 80% from SLP’s 1Q2020 net profit.

• The results came below our previous expected forecast of RM20.4 mln (making up to only 19.4% of our estimate), mainly due to the lower top line contribution, coupled with the higher effective tax rate at 23.9% vs. our estimate at 15.0%. Meanwhile, the reported revenue also came below our forecast, accounting to 22.1% of our estimated revenue of RM154.5 mln.

• Following the weaker performance in 1Q2020, we trimmed our 2020 forecast earnings by -18.4% to RM16.6 mln, whilst revenue is revised downwards by -15.1% to RM131.0 mln to reflect the lower turnover this year amid the coronavirus epidemic that is spreading globally, coupled with the extended movement control order (MCO) that is taking place which disrupted production. At the same time, demand is likely to remain soft over the foreseeable future on the back of the stand still economy growth across the globe.

Prospects

We expect to see 2Q2020 numbers to remain downbeat as the MCO in Malaysia was only enforced from end 1Q2020. Nevertheless, we reckon that sales will pick up from 2H2020 following the gradual re-opening of economy, but full year net profit growth would still encounter a bump.

Resin prices are expected to remain soft in view of the low crude oil prices environment. This bodes well for SLP as the lower raw material costs for plastic packaging materials may help to sustain their margins. However, the prevailing low prices may also suggest that demand would stall as purchasers adopt the wait-and-see approach over the near term.

Moving forward, the group will focus on packaging products which are deem to be essential in the food & beverages (F&B), hygiene and healthcare sectors. The move may mitigate the softness from the drawdown order for the 2020 Tokyo Olympics which the company is scheduled for 500 tonnes of plastic packaging materials.

Valuation and Recommendation

Given the recent recovery in share price, we reckon that valuations have turned lofty and we downgrade SLP to SELL (from Hold) with a lower target price of RM0.80 (from RM0.88) due to the downward revision of our earnings forecast to account for the impact of Covid-19.

Our target price is based on an unchanged target PER of 13.0x to our 2021 EPS of 6.2 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.

Source: Mplus Research - 14 May 2020