After a recent site visit, we are turning more bullish on SLP, upgrading our call to OUTPERFORM from MARKET PERFORM. SLP has been able to raise their products’ ASPs (by 10-15%) to match the higher resin costs (up 10-15%). The Group also has several new high-margin products in the pipeline, which we think will allow it to grow revenues while preserving margins. Resin costs are starting to flatten as they continue to raise ASPs. We raise FY21E/FY22E CNP by 9%/3% to RM21.5m/RM22.3m. Hence our TP is raised to RM1.22 (from RM0.95) on higher FY21E EPS of 6.77 sen and PER of 18x (from 14x), which is -0.5SD (vs -1SD previously) from its 5-year mean.

Passing on costs. YTD, while resin costs have increased by 10-15%, SLP has also been able to pass on such hikes, as seen in the similar 10-15% rise in their ASPs. More importantly, SLP’s customers are accepting of the higher ASPs as there is generally a broad-based rise in selling prices of plastic products. Relative to SLP’s peers, SLP is more able to pass on the higher costs of garbage bags to Japanese customers, as SLP serves numerous small customers in Japan, vs. the handful of large customers of its peers.

Signs of flattening resin prices. Since the end of March, resin prices have fallen by between 2% to 5%, showing signs of softening supply-demand dynamics. That said, resin prices are likely to remain steady for some time as the month-long disruption has left deep deficits throughout the global supply chain. For SLP, which resin composition of mainly LLDPE (45% of COGS) and HDPE (35% of COGS), we maintain our CY21 average resin cost assumption of USD1,100/MT vs the market price of ~USD1,300/MT.

Upcoming new products. SLP has several new products in the pipeline, one of which is a medical device packaging, which had already begun production in Feb 2021. Management guided that the product, which commands above Group’s average margin (SLP’s GP margin: 17~22%), is for a long-time customer and we believe that the product will be a new source of recurring revenue for SLP. Furthermore, management has also indicated that they are in discussion with a new customer for a new packaging product that will also fetch superior gross margins.

Post-site visit. Increase FY21E/FY22E CNP by 9%/3% to RM21.5m/RM22.3m from RM19.7m/RM21.6m. We keep our FY21E revenue unchanged but reduce FY22E revenue as our previous estimate of RM200m appears too aggressive relative to SLP’s expansion plans. We raised FY21E/FY22E CNP as we raised our CNP margin assumptions from 11% to 11.9% for FY21 and from 10.8% to 12% for FY22. We raised our CNP margin estimates on the back of its: (i) ability to raise ASPs and (ii) new high margin products. We maintain our FY21E/FY22E DPS at 5.5 sen each (FY19 and FY20: 5.5 sen each), implying yield of 6%.

Upgrade to OUTPERFORM with a higher TP of RM1.22 (from RM0.95) on an ascribed forward PER of 18x on FY21E EPS of 6.77 sen. The ascribed 18x PER (from 14x PER) is now at -0.5SD (vs. -1SD) of 5-year mean of 21x. We have increased our ascribed PER ratio on SLP because we are turning more bullish on the stock for: (i) their ability to pass on higher costs, (ii) growth in high margin products and (iii) improving sentiment on plastic manufacturers. We did not raise the PER to its 5-year mean as demand for its products is still recovering. That said, the current share price implies a forward PER of 14x, significantly below its 5-year mean of 21x, suggesting that the market is underestimating SLP’s ability to pass on higher costs.

Risks to our call include: (i) higher-than-expected resin costs (ii) labour shortage (iii) lower-than-expected orderbook

Source: Kenanga Research - 15 Apr 2021