We recently met up with management of SLP Resources (SLP) for a business update. For 2019E, we expect SLP to report decent earnings growth of 6.5% yoy, led by higher production capacity, low resin costs and a weak RM. That said, we believe the positives are largely priced in; with the shares trading at a 15x 2019E PER and 3.8% yield, SLP’s valuation looks fair. We maintain our HOLD rating and TP of RM1.30, based on a 2020E PER of 15x.

Revenue Set to Recover in 2H19; Capacity Expansion on Course

Notwithstanding the 2.5% yoy drop in 1Q19 revenue, we expect SLP to deliver stronger sales growth in 2H19, due to robust demand from export markets (58% of 1Q19 revenue), a recovery in the domestic market, and capacity expansion (SLP is on track to increase its 2019 capacity by 18.5% to 32k MT/annum). Elsewhere, growing demand for sustainable packaging materials offers new business opportunities for its in-house recyclable films. Meanwhile, we believe its backsheet business venture may face further delays, due to stiff competition in the China diaper market.

Temporary Margin Uptick Likely in 2019E

We expect SLP’s EBITDA margins to see notable improvements in 2019E, owing to the weakening of the RM (vs. USD), low resin cost and a highermargin sales mix. However, we think this will not last long. Our O&G analyst and economics team expect higher crude oil prices in 2H19 (higher feedstock prices) and for the RM to strengthen vs. the USD by end-2019.

Maintain HOLD Rating and TP of RM1.30

We leave our 2019-21E core EPS unchanged. We maintain our HOLD call on SLP with an unchanged 12-month TP of RM1.30, based on a 2020E PER of 15x. With the shares trading at a 2019E PER of 15x, close to their past-10-year average of 15x, valuation looks fair. The key upside risk to our call would be lower resin costs; downside risks would be: i) volatility in foreign currencies (mainly USD vs. the RM), (ii) weaker Japan sales, and (iii) a possible ban on single-use plastics.

Source: Affin Hwang Research - 7 Jun 2019