M+ Online Research Articles

SLP Resources Bhd - Recovery in sight, but valuations are fair

Publish date: Mon, 28 Feb 2022, 09:19 AM
An official blog in I3investor to publish research reports provided by Malacca Securities research team.

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  • SLP Resources Bhd’s (SLP) 4QFY21 net profit declined 1.3% YoY to RM3.9m, dragged down by the higher resin prices that affected the costs of production. Revenue for the quarter, however, improved 10.5% YoY to RM45.2m. A fourth interim dividend of 1.5 sen per share, payable on 13th April 2022 was declared.
  • For FY21, cumulative net profit rose 7.6% YoY to RM17.7m. Revenue for the year added 14.9% YoY to RM168.9m. The reported earnings came below expectations, making up to 84.6% of our forecasted net profit of RM21.0m and 91.4% of consensus forecasted net profit at RM19.4m. The variance is mainly due to the higher-than-expected resin prices that affected its margins.
  • Local sales at RM27.3m continue to dominate, accounting to 60.3% of total revenue in 4QFY21, followed by sales to Japan at RM15.0m (33.1% of total revenue) and the balance (6.4%) to Australia and other countries at RM3.0m. We note that export towards the Europe region may remain dormant.
  • Sales are expected to demonstrate improvement in 2022 as Kedah state has moved into the Phase 4 under the National Recovery Plan (NRP) from 8th November 2021. Meanwhile, SLP remains focused on the automation process, which has already brought down its workforce from 363 in early 2021 to below 300 at present. For now, SLP will be targeting to bring its utilisation rate back to pre Covid-19 levels, which is at around 75.0%.
  • Moving forward, SLP aims to strengthen their position in the medical industry following the shift in demand. Given that contribution from medical packaging is still miniscule against the total revenue (<5.0% of total revenue in FY21), we foresee that sales growth to the aforementioned industry to deliver bigger impact for FY22f.
  • While resin prices appear to have stabilised at current levels, we think that prices will sustain largely above the pre-Covid-19 level, on the pent-up demand and supply chain disruption. Stockpiling activities from traders could also re-start, owing to the rising crude oil prices and this could further exacerbate to the undersupply situation. For now, we expect resin prices to average US$1,100-1,300/MT in 2022.

Valuation & Recommendation

  • Given that the reported earnings came below our expectations, we trimmed our earnings forecast by 10.7% and 5.2% to RM21.0m and RM23.1m for FY22f and FY23f respectively, taking into account of the margins compression from the elevated resin prices, which we expected to persists over the foreseeable future.
  • We maintained our HOLD recommendation on SLP with a lower target price of RM0.86 (from RM0.96). Our target price is based on the assigned target PER of 13.0x to our FY22f EPS of 6.6 sen. At RM0.95, we note that prospective dividend yields are fairly attractive at 6.3% and 6.8% for FY22f and FY23f 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).

Source: Mplus Research - 28 Feb 2022

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