We recently hosted SLP Resources’ (SLP) presentation to 10 Malaysian institutional investors. SLP remains positive on its prospects given capacity expansion as well as better margins from softer raw material prices, higher-margin products and a temporary lift from the weak Ringgit. We reaffirm our BUY call with a higher TP of RM1.50 from RM1.33 (based on 15x FY19E EPS).

Capacity Expansion on Track; Attempts to Penetrate China Market

SLP’s production capacity rose to 27k tonnes/annum (from 24k tonnes/annum) with the newly acquired extrusion line added in late April 2018. This additional line will help facilitate the expansion of breathable backsheet for baby diapers. Management believes that the thinner backsheet diapers will be appealing to the cost-conscious China-based diaper producers.

Margins likely to normalise from softer resin cost, better product mix

We expect the EBITDA margin to normalise to 17.5% by 2H18 (from 15.7% in FY17), premised on softer raw material prices, a better product mix and a temporary weakness in the Ringgit. Despite the higher high-density polyethylene (HDPE) and low-density polyethylene (LDPE) prices, which could lead to higher raw material prices (HDPE & LLDPE are ~80% of SLP’s raw materials), we are not overly concerned about the impact to SLP’s profitability, as we believe its niche products command higher margins.

Maintain BUY With a Higher TP of RM1.50

We have raised our EPS forecasts by 3%-19% for FY18-20, to factor in higher revenue growth and higher margin expectations. We raise our 12- month TP to RM1.50 (from RM1.33), based on an unchanged FY19E PER of 15x. We continue to like SLP for its expertise in thin-gauge plastic products, superior margins and compelling valuations of 13x FY19E PER /3% yield. Downside risks: higher-than-expected raw material prices, a slowdown in capacity expansion and weak export demand.

Source: Affin Hwang Research - 17 Aug 2018