Summary

• SLP Resources Bhd’s (SLP) 1QFY21 net profit grew 52.1% YoY to RM6.0m, on higher average selling prices (ASP) and sales volume for plastic flexible packaging products and plastic resins. Revenue for the quarter added 34.9% YoY to RM46.0m. A first interim dividend of 1.0 sen per share, payable on 8th July 2021 was declared. 

• The results came above our expectations, accounting to 31.0% of our forecasted net profit of RM19.5m and 28.0% of consensus forecasted net profit at RM21.5m. Meanwhile, the reported revenue also came above our forecast, making up to 30.4% of our estimated revenue of RM151.2m and 25.6% of consensus revenue of RM180.0m.

• After recording zero sales to European countries in 1QFY21, we opined that the trend will largely remain unchanged with the region’s path of recovery remains clouded by a barrage of uncertainties. Still, the upbeat local sales as well as the Japanese market may underpin the recovery progress as 1QFY21 local sales rising 50.3% QoQ to RM25.6m, whilst sales to Japan rose 20.7% QoQ to RM16.4m.

• Moving forward, we believe that sales from the local market will continue to dominate, contributing slightly more than 50.0% of total revenue in FY21 as the shortage of containers and high logistic charges may continue to delay export shipment to the overseas customers.

• SLP will focus on ramping up the production of kitchen and garbage bag, targeting approximately 25.0% of production output in FY21f (from less than 20% recorded in FY20). Following the rising healthcare awareness, SLP aims to undertake new products, namely medical pouches, tacky mats and door handle refills.

• Polyethylene (PE) prices was on the rise since the start of the year as resin prices surged in tandem with the higher crude oil prices. This bodes well for SLP to revise their ASP higher, whilst the flexible packaging remains as the preferred choice of packaging for consumers. We also note that SLP maintains a lean balance sheet with zero borrowings, whilst cash position of RM72.0m in 1QFY21 translates to net cash per share of 22.7 sen (c.23.8% of share price).

Valuation & Recommendation

• With the reported earnings coming above our forecast, we revise our earnings estimates higher by 29.3% and 28.4% to RM25.2m and RM25.7m in FY21f and FY22f respectively as we expect the ASP will hold at current levels over the foreseeable future. Consequently, we upgrade SLP to HOLD (from SELL) with a higher target price of RM1.03. Our target price is based on the assigned target PER of 13.0x to our revised FY21f EPS of 7.9 sen.

• At RM0.955, we note that prospective dividend yields are fairly attractive at 7.3% 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 USD 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 - 10 May 2021