Kenanga Research & Investment

SLP Resources Berhad - Ample Opportunities Remain

Publish date: Mon, 28 Feb 2022, 09:33 AM

FY21 CNP of RM17.5m came below expectation at 90% of our estimate, but 4QFY21 DPS of 1.5 sen brought FY21 DPS to 5.5 sen, which is within our estimate. QoQ, CNP was higher due to higher revenue. We expect SLP will be able to sustain its superior margins on the back new market penetrations and robust demand. Maintain FY22E earnings and introduce FY23E CNP of RM24.6m. Maintain OP with an unchanged TP of RM1.18 based on FY22E EPS of 7.1 sen at 16.6x PER.

Below expectation. FY21 CNP of RM17.5m came in below expectations at 90% of our estimate due to higher raw material cost and supply chain disruption. 4QFY21 DPS of 1.5 sen brought FY21 DPS to 5.5 sen, which is in line with our estimate.

YoY, FY21 revenue improved 14.9%, mainly on higher sales and trading volume for its plastic packaging products. Operating profit rose 5.5% due to a better product mix. All in, CNP rose 9.7% on a lower effective tax rate of 24% (vs. FY20: 27%).

QoQ, 4QFY21 CNP rose 25.8% in tandem with a 25.1% rise in revenue, thanks to: (i) higher sales volume from manufacturing and trading segments, (ii) elevated ASPs across the board, and (iii) recovering economic activities. Manufacturing sales volume improved due to diverted orders from existing customers and robust demand from regional festivals, while trading sales and margin improved, likely due to resin buyers increasing inventory of resins fearing fluctuation in resin costs.

Outlook. Recently, global resin prices have risen c.10% since early 2022 driven by: (i) geopolitical tension raising the risk of higher oil prices, and (ii) global supply chain disruption. We estimate resin prices will continue to stay elevated until 1HCY22 due to the above concerns and we reiterate that ASPs will increase in tandem with the rising resin costs. Based on SLP’s utilization rate of 60-62% in 4QFY21, we assume its utilization rate will sustain at 60-65% in FY22 alongside the risk of labour shortage issue. We are optimistic that SLP’s trading GPM will maintain at c.6-8% due to higher ASPs on raw material. We are also bullish on SLP’s manufacturing segment driven by: (i) new market penetration in Vietnam which is selling new premium products to customers, (ii) robust demand from export markets, and (iii) a shift in product focus. However, we are cautious on the manufacturing margins in subsequent quarters on the back of: (i) higher production cost on elevated freight cost and raw material, and (ii) supply chain disruption caused by the shortage of shipping containers and labour. We have factored in average manufacturing GPM of c.23% for FY22 and FY23.

Maintain FY22E earnings and introduce FY23 estimates. We maintain FY22E estimates and introduce FY23E CNP of RM24.6m and DPS of 5.5 sen, implying a 5.8% yield.

Reiterate OUTPERFORM with unchanged TP of RM1.18 based on FY22E EPS of 7.1 sen with an ascribed 16.6x PER, which is -0.5SD to its 5-year mean of 18x. We maintain our valuation to reflect their lower utilization rate than its peers and possible production disruption risk.

Risks to our call include: (i) higher-than-expected resin cost, (ii) lower- than-expected export demand, (iii) foreign currency risk, and (iv) labour shortage.

Source: Kenanga Research - 28 Feb 2022

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