Summary

• SLP Resources Bhd’s (SLP) 4QFY20 net profit declined 7.7% YoY to RM3.8m, due to lower amount of tax incentive in the form of Reinvestment Allowance (RA) on capital expenditure. Revenue for the quarter, however, climbed 7.9% YoY to RM40.9m. For FY20, cumulative net profit slipped 24.1% YoY to RM16.3m. Revenue for the year decreased 11.9% YoY to RM147.0m. A fourth interim dividend of 1.5 sen per share, payable on 13th April 2021 was declared.

• The results came in line with our expectations, amounting to 98.1% of our forecasted net profit of RM16.6m and 94.8% of consensus forecasted net profit at RM17.2m. Meanwhile, the reported revenue came slightly above our forecast, making up to 112.2% of our estimated revenue of RM131.0m and 101.4% of consensus revenue of RM145.0m.

• After recording zero sales to European countries in 4QFY20, we opined that the trend will largely remain unchanged with the region’s path of recovery remains rocky, particularly in 1H2021 amid the extended lockdowns. On a brighter note, the recovery in local sales may continue to provide some cushion that saw FY20 local sales rising 16.8% YoY to RM78.3m.

• Moving in FY21f, we believe that sales from the local market will continue to take charge (>50%), after raking 53.3% of total revenue in FY20 as oppose to only 39.0% recorded in FY19. For now, SLP will focus on ramping up the production of kitchen and garbage bag, targeting 25% of production output in FY21f (from less than 20% recorded in FY20).

• Cost wise, polyethylene (PE) prices was stable since the start of the year, before trending sharply higher in recent days, in line with the higher crude oil prices. As it is, we reckon that SLP’s recovery will be tepid as economic activities in their major export market portfolio such as Europe and Japan continues to stall. Also, we note that the weakening USD against the ringgit does not bode well.

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 the assigned 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 RM74.4m as of FY20, translating to net cash per share of RM0.23. At RM0.89, prospective dividends are also fairly attractive at 6.2% for FY21f and FY22f each.

• 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 is largely offset by export sales denominated in the same currency (close to 50.0% of total export revenue).

Source: Mplus Research - 25 Feb 2021