SLP Resources Bhd (SLP) is primarily involve in manufacturing and sale of plastic packaging products and plastic related goods, and trading of polymer products such as resin. The company produces over 1000 plastic packaging products for domestic and international markets. SLP’s net profit fell by 23.4% in FY20 mainly due to the impact of MCO and higher raw material prices. Recently, the company has been able to pass on the raw material price increases by raising the average selling price (ASP) of their products. BUY with a target price of RM1.36 based on PER of 20x (5 years average) over FY22 EPS.

The essential products of SLP include kitchen bags, garbage bags, VFFS films, fashion bags, patch handle bags, industrial bags, cooking oil VFFS films and quality films for healthcare packaging. The company produced 17,000 tonnes and 14,200 tonnes of flexible packaging material products in FY19 and FY20 respectively at utilisation rate of around 60%-65%. Utilisation for FY21 should be slightly higher than FY20 as guided by management.

Total output in FY20 was slightly lower mainly due to the impact of MCO. Kitchen and garbage bags form about 17% of the group’s total output in FY20. Management guided to raise the portion to 25% in 2021. The division will generate 50% of SLP’s total revenue in FY21.

Since 2020, resin prices have been on the uptrend while SLP has been able to raise their products’ average selling prices by 10-15% to match the higher resin costs. Management noted that customers are accepting the higher ASPs as there is generally a broad-based rise in selling prices of plastic products. 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.

The company has introduced several value-added flexible plastic packaging products for use beyond the food and beverage industries such as personal care, home care, health care and industrial sectors. We reckon these new high-margin products will expand SLP’s revenues while maintaining margins.

We expect SLP to register net profit of RM18.3m and RM21.5m for FY21 and FY22 respectively on the back of higher utilisation rate and revised ASP. We believe the company will maintain its dividend payout of 5.5sen for FY21 and FY22 respectively, translating into yield of 5.4%. Meanwhile, balance sheet is strong with net cash of RM71.5m (23sen per share). BUY with a target price of RM1.36 based on PER of 20x (5 years average) over FY22 EPS.

Source: Rakuten Research - 21 Jun 2021