Summary

• SLP Resources Bhd’s (SLP) 3QFY20 net profit fell 21.9% YoY to RM4.4m, dragged down by weaker sales volume for export markets that was impacted by lockdowns which offset the stronger domestic sales. Revenue for the quarter declined 12.9% YoY to RM37.1m. For 9MFY20, cumulative net profit slipped 28.1% YoY to RM12.5m. Revenue for the period decreased 17.7% YoY to RM106.0m. A third interim dividend of 1.5 sen per share, payable on 6th January 2021 was declared.

• The results came in line with our expectations, amounting to 75.0% of our forecasted net profit of RM16.6m and 65.5% of consensus forecasted net profit at RM19.1m. Meanwhile, the reported revenue came slightly above our forecast, making up to 80.9% of our estimated revenue of RM131.0m and 60.9% of consensus revenue of RM174.0m.

• While the exports sales are expected to remain sluggish as certain European countries have returned to lockdown, we reckon that the weakness will be cushioned by the improved sales from the local market. Already, 3QFY20 bottomline rose 7.8% QoQ alongside with the recovery at topline that registered 6.6% QoQ improvement.

• Moving forward, we believe that sales from the local market will continue to dominate, after raking 53.2% of total revenue in 9MFY20 as oppose to 39.0% recorded in the previous corresponding period.

• Polyethylene (PE) prices remained stable over the past two months, hovering near pre-Covid-19 level augurs well for SLP. This suggests that demand has picked up in recent months on the gradual recovery in economic activities. Moving forward, SLP will focus on consumer packaging products which demonstrate improved demand.

• While we remain cautious on the Covid-19 pandemic that resulted in several waves of outbreak across the globe, we believe that the longer term demand for flexible packaging trends across Asia will remain resilient.

Valuation & Recommendation

• With the reported earnings coming within our forecast, we made no changes to our earnings estimates and 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.

• We reckon that SLP is well equipped to weather the current downturn, backed by solid balance sheet with net cash of RM73.1m as of 3QFY20, translating to net cash per share of RM0.23. At RM0.925, prospective dividends are also fairly attractive at 5.4% and 5.9% 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 US Dollars is capped to about 5.0% as raw material costs and is largely offset by export sales denominated in the same currency (approximately 50.0% of total export revenue).

Source: Mplus Research - 9 Nov 2020