• SLP Resources (SLPR) reported a weak set of results – 6M20 core net profit fell by 32% yoy to RM8m, largely due to lower revenue and higher effective tax rate.
• Yet, we deem the SLPR’s 6M20 results above our expectations, as we expect earnings recovery from better local sales in 2H20.
• We raised our 2020-22E earnings forecasts by 17-25% after incorporating higher revenue. In tandem, we have revised our price target to RM1.05 (from RM0.84), but maintain our HOLD rating.

Sequentially Weaker Due to Margin Erosion and Higher Tax Rate

Although revenue showed a marginal improvement, SLPR’s 2Q20 core net profit dropped by 6% qoq to 3.9m, largely due to weaker EBITDA margins (-0.7ppts to 19.2% on higher Covid-19 expenses) and higher effective tax rate of 24.2% (1Q20: 23.9%).

6M20 Core Net Profit Lower by 32% Yoy

Cumulatively, SLPR’s 6M20 core net profit decreased by 32% yoy to RM8m, due to lower revenue and higher effective tax rate of 24% (vs. 6M19 tax rate:13%; due to absence of reinvestment allowance). At the top-line, the 6M20 revenue was lower by 20% yoy on weaker export sales (-35% yoy), particularly to European countries (-96% yoy), Japan (-26% yoy) and Australia (-56% yoy). Given that these countries are still badly affected by the Covid-19 pandemic; we believe the export sales will likely remain sluggish in 2H20. That said, the Group alluded that domestic sales (c.51% of 6M20 revenue) are starting to pick up, and will likely offset the weak export demand in 2H20. Overall, SLPR’s 6M20 comprised 52% of our full-year estimate, but we deem the results above expectations, as we expect the earnings to recover in the quarters ahead.

Backsheet, a Key Component in the Making of PPE

Meanwhile, we gather that SLPR’s backsheet, which was largely used for diapers, is now a key component for the making of Personal Protective Equipment (PPE; ie lab gown). Certified by the Ministry of Health of Malaysia, the PPE is used in local hospitals, and the key customer that SLPR is supplying to, is planning to distribute the PPE to the Western countries.

Maintain HOLD With Higher TP of RM1.05

We have raised our EPS forecasts for 2020-23E by 17-25% to account for higher revenue from local sales, and raise our TP to RM1.05 (from RM0.84), based on an unchanged 15x 2021E PER. Maintain HOLD. With the shares trading at a 2021E PER of 15x, close to their past-10-year average of 15x, valuation looks fair. Key upside/downside risks to our call include: (i) volatility of resin costs, (ii) foreign currency risk (from strengthening/weakening Ringgit), and (iii) stronger/weaker export sales.

Source: Affin Hwang Research - 10 Aug 2020