Kenanga Research & Investment

SLP Resources Berhad - 1QFY22 Within Expectation

Publish date: Wed, 11 May 2022, 09:52 AM

1QFY22 CNP came within our expectation at 20% of our FY22 estimates. DPS of 1.0 sen is as expected. With increased sales volume and ASPs in both manufacturing and trading segments, margins expanded QoQ. We remain positive on SLP for its better product mix and sustainable products demand. As we expect earnings in the coming quarters to come in stronger, we maintain our FY22E/FY23E numbers and DPS of 5.5 sen each, yielding 6.1%. Maintain OP with unchanged TP of RM1.18 based on FY22E EPS of 7.1 sen at 16.6x PER.

Within expectation. 1QFY22 CNP of RM4.5m came in line with our expectation at 20% of our full-year CNP estimate of RM22.5m. 1QFY22 dividend of 1.0 sen is within our estimate.

YoY, 1QFY22 revenue fell by 1.1%, mainly due to labour shortage in production as a result of lower sales volume from the manufacturing segment. 1QFY22 CNP declined 25.3% in tandem with PBT due to higher production costs (such as raw material, labour cost, while utility costs have increased c.15% due to higher electricity tariff). Reflecting this, operating margins dropped by 4.3ppt to 12.6% in 1QFY22.

QoQ, despite soaring resin cost due to the geopolitical tension, SLP reported revenue of RM45.5m (+0.6%), on the back of: (i) increased sales volume from both manufacturing and trading segments, (ii) elevated ASPs across the board, and (iii) new recurring income from new product (MDOPE). Operating profit improved by 13.7% as operating margins rose by 1.4ppt, likely due to better product mix and operational cost efficiency. All in, CNP was up by 15.3% on a lower effective tax rate of 22% (vs. 4QFY21: 25%)

Outlook. We expect resin prices to maintain elevated at a higher price level until 1HCY22 due to: (i) unresolved geopolitical tension, (ii) the recent lockdown in China, and (iii) the ongoing supply-chain crunch. Thus, we foresee that ASP will remain stable with the elevated resin costs. We gathered that SLP’s utilization rate has declined to 55% in 1QFY22 (vs. 4QFY21: 60-62%) due to the festive break in February 2022. We understand that SLP faces labour shortage issues, and to reduce the dependence on labour, SLP will implement a strategy of automating manual processes with a guided capex of RM800k for FY2022. We continue to be positive on SLP on the back of: (i) better product mix in the manufacturing segment, (ii) maintaining a favorable trading margin due to higher ASPs on raw materials, and (iii) sustainable demand. However, we also continue to be prudent on the manufacturing margin in the subsequent quarters on the back of: (i) higher production cost on the increase in labour cost and utility cost, (ii) prolonged supply chain disruption, and (iii) strong USD which will affect customers’ buying power.

No changes to FY22E/FY23E estimates as we expect earnings in the subsequent quarters to catch up following the weak 1QFY22 result.

Maintain 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 its lower utilization rate than its peers and prolonged supply chain disruption, which affect cost efficiency. A reliable dividend yield of 6.1% is above the industry average of 4.2%.

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

Source: Kenanga Research - 11 May 2022

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