Summary

• SLP Resources Bhd’s operations were partly disrupted during the Movement Control Order (MCO) period whereby only close to 50.0% of the overall production was in operational before gradually returning to full force in recent months. With the Covid- 19 pandemic still at large particularly in several countries, we see the general demand remain downbeat against pre-Covid-19 levels as majority of SLP clients are small-medium size companies (SME). Hence, we reckon that the pace of recovery in 2HFY20 to be measured, unless a vaccine is officially produced by end of the year.

• Moving forward, SLP will focus on production of essential packaging products for food & beverages (F&B), hygiene and healthcare sectors. The shift in consumer behaviour from dining out to take-away and home cook is deemed as an opportunity for plastic packaging products players to capitalise.

• We are sanguine on the resumption of overseas shipment (Australia, New Zealand and Japan) in June 2020 as export sales traditionally contributed more than 50% of the group’s total revenue. Despite that, we see contributions from local market to come in at around 50% level in FY20f on the back of higher demand in the local scene, coupled with the export shipment disruption in 1HFY20.

• On the supply side, we note that resin prices have rebounded towards near US$900 per tonne as of late vs. approximately US$700 per tonne registered in May 2020. This bodes well for SLP as the downtrend in prices of resin may see customers continue to delay their orders, wait for further opportunity to lock in purchases at lower prices. The higher prices also underscored the recovery in demand for plastic packing raw materials.

• In the meantime, the US Dollar remain above USD/MYR 4.20 level since early-March 2020 bodes well for SLP with majority of the sales are exported to overseas, mainly to Japan and Australia. The prevailing weak local currency may potentially boost SLP margins which may provide some cushion to impact from the weaker top line performance.

Valuation & Recommendation

• We maintained our SELL recommendation on SLP with an unchanged target price of RM0.80 as we made no changes to our earnings forecast for both FY20f and FY21f. 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 slightly 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.

• We reckon that SLP is well equipped to weather the current downturn, backed by solid balance sheet with net cash of RM76.8m as of 1QFY20, translating to net cash per share of RM0.24. Prospective dividends are also fairly attractive at 3.3% and 5.5% for FY20f and FY21f respectively. A re-rating are also in the cards should demand recovers or a vaccine for Covid-19 is discovered sooner-than-expected.
   
• Risks to our recommendation include the volatility in the global resin prices which affect production costs and margins. 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 (more than 50.0% of total export revenue).

Source: Mplus Research - 23 Jul 2020