Summary

• SLP Resources Bhd (SLP) saw its operations returned to full force in recent months as the company ramp up their production to fulfil the backlog orders. Although the recovery is on the cards, we think that production has yet to reach pre-Covid-19 levels as demand remain relatively sluggish, particularly from Europe that is remain beleaguered by the continuous rising new daily cases. Nevertheless, the worst could be over for SLP as days of recovery are set to shape up in FY21f.
• Moving forward, SLP will focus on production of garbage and kitchen bags for the Asia Pacific region, premised to the rising demand in line with the increase in global population growth. At the same time, demand for packaging materials are expected to remain solid due to the change in the consumer trends that are opting for take away/delivery as oppose to the traditional dining out as a measure to minimize human contact.

• At the same time, we note that demand from Australia and New Zealand for retail packaging (shopping bags) have returned to pre-Covid-19 level. This bodes well, although contribution from the aforementioned countries historically makes up less than 10.0% of total revenue.

• On the supply side, we note that resin prices have soared above US$1,100 per tonne, from the low of US$800 per tonne registered in May 2020. The higher prices underscored the recovery in demand for plastic packing raw materials and we think that the trend will remain firm throughout 4Q2020.

• In the meantime, the US Dollar averaging at USD/MYR 4.23 YTD bodes well for SLP with majority of the sales are exported to overseas, mainly to Japan and Australia. The prevailing weak local currency may sustain SLP margins which provide some cushion to impact from the weaker top line performance.

Valuation & Recommendation

• We made no changes to our earnings forecast, pending the release of 3QFY20 results tentatively in early-November 2020. Hence, we maintained our SELL recommendation on SLP with an unchanged target price of RM0.80. Our target price is based on an unchanged target PER of 13.0x to our FY21f EPS of 6.2 sen. While the assigned PER is slightly higher than its closest peer; Thong Guan Industries Bhd, 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 RM76.5m as of 2QFY20, 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.

• 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 - 19 Oct 2020