SLP Resources Bhd’s (SLP) has been ordered to close its plant in Kulim, Kedah, until 16th September 2021 after some of its workers tested positive for Covid-19. The Covid-19 cases had been identified at the plant following a routine screening and subsequent targeted screening on its workers, which the company temporarily halted operations from 8.00am on 9th September 2021 to carry out thorough disinfection work.
The temporary closure is expected to impact sales and production in the current quarter. We foresee the disruption of production to impact approximately 2.0-3.0% of annual production output for FY21f.
We believe that it is necessary for the temporary closure to take place in order to break the chain of Covid-19 infection and prevent the situation from escalating in SLP’s manufacturing plant. As it is, SLP has adopted and will continue all possible and necessary standard operating procedures (SOP) at its operations, premises as well as hostels which include social distancing measures, temperature checks, proper hygiene, PPE usage and regular sanitisation.
Nevertheless, outlook remains well supported by the improving demand that are expected to remain resilient under the prevailing circumstances. The work-from home measures has resulted in the pent-up demand for packaging due to change in consumption patterns of consumers with delivery orders on the rise across food & beverage, consumer electronics, healthcare and other essential products.
We gather that current average selling prices remains favourable for SLP owing to the rise in resin prices. Traditionally, plastic packaging players adopt a cost-pass through mechanism, though there will be approximately 3 months of time lag. At the same time, the weakening ringgit against the greenback also bodes well for SLP which derived RM39.5m or 45.1% of revenue from overseas in 6MFY21.
Valuation & Recommendation
We trimmed our earnings forecast by 2.3% and 0.2% to RM24.6m and RM25.1m for FY21f and FY22f respectively; accounting for the temporary production disruption. Despite that, we maintained our HOLD recommendation on SLP with an unchanged target price of RM1.03, as we rolled over our valuation metrics to FY22f.
Our target price is based on the assigned target PER of 13.0x to our FY22f EPS of 7.9 sen. At RM0.96, we note that prospective dividend yields are fairly attractive at 7.3% for both FY21f and FY22f 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 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).
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