SLP has been able to raise their products’ ASPs (by 10-15%) to match the higher resin costs (up 10-15%). Though resin costs are starting to flatten, ASPs continue to increase. BUY with TP of RM1.22 on higher FY21E EPS of 6.77 sen and PER of 18x. 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. 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.

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 the higher ASPs as there is generally a broad-based rise in selling prices of plastic products. Since the end of March, resin prices have fallen by between 2% to 5%, showing signs of softening supply-demand dynamics. Nonetheless, resin prices are likely to remain steady for some time as the month-long disruption has left deep deficits within the global supply chain.

SLP has several new products in the pipeline, one of which is a medical device packaging and has already begun production in Feb 2021. Management guided that the product, which commands above 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.

We keep our FY21E revenue unchanged but reduced FY22E revenue as our previous estimate of RM200m appears too aggressive relative to SLP’s expansion plans. We raised FY21E/FY22E CNP (core net profit) 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%.

Source: Rakuten Research - 15 Apr 2021