SLP is a premium plastic manufacturer that supplies proprietary ultrathin flexible-plastic packaging (FPP) products largely for the consumer industry. Over 60% of SLP’s revenue is derived from exports, with Japan and Australia being key markets. With new capacity coming on-stream, SLP plans to penetrate the China market with new products. We initiate coverage with a BUY call and TP of RM2.87, based on a 26.0x 2018E PER, for upside potential of 14.7%.

Above Average ASPs, Low Cost Structure

SLP’s key strength lies in its manufacturing technology, innovation and indepth experience in producing premium packaging products that command higher ASPs and require fewer raw materials. As a result, SLP commands one of the highest margins (net margins in 2016: 15.1%) compared to other plastic manufacturers. Moreover, the company has been exporting its products to Japan, in particular, for more than 20 years, a testament of the quality of its products. Domestically, it has a leading market share for packaging of edible oil. Felda and Sime Darby are their key customers.

Capacity Expansion Underway for Penetration Into New Markets

SLP’s recent investments (capex of RM13.4m in 2016 and RM11m in 2017E) for factory expansion and new-machine installations should increase the group’s production capacity by 17% this year and 21% in 2018. With the increased capacity, management targets to grow the export market, which is more profitable. In 2017, plans are to penetrate the Chinese market with a new back sheet for baby diapers as well as the hygiene segment.

Initiate Coverage With BUY Rating and Target Price of RM2.87

We like SLP as it has minimal competition. SLP exports most of its products, mainly to the consumer sector, which is relatively resilient. The expansion into new markets should be positive and underpins our 10.1% EPS CAGR over 2017-20E. Moreover, we expect margin improvement from lower material cost and better product mix. Initiate coverage with a BUY rating and 12-month target price of RM2.87, based on 26x our 2018E EPS (14.7% upside potential). Key risk: a spike in crude-oil prices.

Source: Affin Hwang Research - 25 May 2017