We recently visited SLP’s manufacturing plant in Kulim, Kedah. We remain upbeat on the group’s earnings prospects, in view of its timely capacity expansion and improving margins arising from flat raw material prices, sales of higher margin products and a weaker Ringgit. Maintain BUY with an unchanged TP of RM1.50, based on 15x FY19E EPS. At 9x PER / 5% yield for 2019E, valuations look attractive.

SLP’s Kulim Plant – Newly Installed Line for Backsheet Is Operational

We recently visited SLP’s manufacturing plant in Kulim, which houses extrusion machines capable of manufacturing a wide range of plastic bags, sheeting and films according to customised specifications. We are pleased to see that its newly installed line for the backsheet business is operational.

Capacity Expansion Should Drive Topline Growth

We expect SLP’s recent capacity upgrade to 27k MT/annum (from 24k MT/annum) to lift its 2H18 topline growth. Moving into FY19, SLP is looking to ramp up production capacity to 33k MT/annum to cater to higher demand in the kitchen bag segment and to facilitate the expansion of breathable backsheet for baby diapers. While SLP is still waiting for feedback from China-based diapers manufacturers, management indicates that there is already strong demand from its existing customers.

Margins Likely to Improve on Flat Resin Cost and Better Product Mix

We expect SLP’s EBITDA margin to improve to 17.5% by 2H18 (from 15.7% in FY17), on flat raw material prices, higher-margin products and a temporary weakness in the Ringgit.

Maintain BUY and TP of RM1.50

We are maintaining our BUY call with an unchanged TP of RM1.50 based on a 2019E PER of 15x. We like the company for its attractive earnings growth of 22% CAGR over 2017-20E, strong execution track record and robust balance sheet. Downside risks: higher-than-expected raw material prices, a slowdown in capacity expansion, weak export demand and losing its Shariah-compliant status due to higher cash holdings in the conventional bank account.

Source: Affin Hwang Research - 29 Oct 2018