We recently visited SLP’s manufacturing plant in Kulim, Kedah for updates on the progress of their automation and capacity expansion plans. All in all, we remain positive on its future prospects as the expansion plans for MaxInflax bags and thin films are well on track to materialise by 3Q15 which we have already accounted for in our earnings forecasts. New machinery focussing on increased automation will also minimize labor cost and promote efficiency. SLP’s prospect is also bright as the strengthening USD will continue to benefit topline as its export sales are USD denominated. We also like the fact that the group is constantly looking to value add via niche products specifications for clients and providing more downstream services in the medium to long-term. We make no changes to earnings as we have already factored in these capacity expansions and have also recently upped our earnings forecasts on the back of higher margins in our last strategy report. Maintain OUTPERFORM on SLP with TP of RM1.76 based on targeted PER of 15.5x (similar to the Tech Sector) on FY16E EPS of 11.3 sen.

MaxInflax-Bags capacity expansion on track. Maxinflax-Bags capacity expansion of 1.8k MT p.a. by 3Q15 is on track, with capacity set at 24,000 MT p.a by end-FY15 and FY16 (MaxInflax will comprise of 38% of the total capacity). This demand is driven by a Japanese customer (Askul Corporation) who operates an online retailer of office products. So far, 2 of the 10 Max Inflax auto packaging machines are being tested, while remaining machines, which also include 6 blown film lines, and 6 bag making lines, are coming on-stream in 3Q15. This is on schedule and is already reflected into our FY15- 16E numbers. We expect the 1,800 MT p.a. capacity to contribute an additional RM7.0m-RM17.0m (3.8%-8.2%) to FY15-16E revenues.

MaxInflax – thin film expansion on full speed as the machines are set to be commercialized in 3Q15. We have already built in the co-extrusion blown film machine, which is set to arrive by 3Q15 into our FY15-16 estimates during our Initiating Coverage Report (16th March 2015) as guided by management back then. We expect Max-Inflax thin film to contribute 7.1%-6.5% of FY15-16E revenues of RM189.6-RM206.7m. All in, the Max-Inflax product line is contributing 10.9%-14.7% to FY15-FY16E revenues.

New machinery to increase automation, allowing for more cost savings. The new machinery for MaxInflax is meant to increase automation, minimising the workforce by 20 working staff for the end line packing division, which can be deployed to other areas. This will allow management to improve on cost savings going forward due to less reliance on labor and increased efficiency. So far, margins have improved from single digit 5.7%-9.9% throughout FY14, to 10.8% in 1Q15 on better sales mix and lower finance cost. Once the new lines and automation are up to full speed, we expect net margins to improve to 11.3%-13.6% in FY15-16E, which is far superior compared to industrial packaging peers of 3.5%-4.5% or other consumer packaging peers of 6.8%- 11.5%.

The strengthening USD may continue to benefit SLP due to its USD denominated export sales. To recap, as at 1Q15 exports constituted 57.0% (vis-à-vis 46.0% in FY14) of total sales and this may continue to grow further assuming the favourable exchange rate remains. We are currently assuming an average USD/MYR exchange rate of RM3.65-RM3.60 in FY15-16E. However, the USD appears to have strengthened even further hitting a high of RM3.81 on 7th July 2015), increasing the full-year USD/MYR average to RM3.66. We may look to upgrade our earnings forecasts going forward should the favourable exchange rates continue to strengthen. Every 5.0% increase in the USD/MYR will result in 3.1% impact to FY16E earnings to RM28.9m.

No changes to earnings as we are comfortable with our margins assumption and have accounted for the expansion plans. However, we may review our earnings estimates if margins are better than expected in coming quarters or if the USD-MYR dynamics moves beyond our assumptions.

 Maintain OUTPERFORM on SLP with TP of RM1.76. Our valuation methodology is based on targeted PER of 15.5x (similar to the Tech Sector) on FY16E EPS of 11.3 sen. We have pegged SLP to trade on par with the Technology sector’s PE of 15.5x, and above industrial packagers (SCIENTEX and TGUAN) as it : (i) is a beneficiary of a strengthening USD, (ii) is a strong export-driven company, (iii) commands strong NP growth prospect of 75.8%-31.1% in FY15-16E, closer to small mid-cap Tech sector average of 62.1%-22.7% vs. its Industrial packaging peers of -4.7%-12.9%, and (iv) enjoys better margins of 11.3%-13.6% in FY15-16E, closer to Tech Sector of 7.0%- 10.0%, and better than industrial packagers’ 3.5%-4.5%. 

Source: Kenanga Research - 22 Jul 2015