Summary

• SLP Resources Bhd’s (SLP) 1QFY22 net profit fell 25.1% YoY to RM4.5m, impacted by the higher costs of production. Revenue for the quarter declined marginally by 1.1% YoY to RM45.5m. A first interim dividend of 1.0 sen per share, payable on 6th July 2022 was declared.

• The reported earnings came below expectations, making up to 21.4% of our forecasted net profit of RM21.0m and 20.1% of consensus forecasted net profit at RM22.5m. The variance is mainly due to margins compression from the higher operational costs.

• Local sales at RM25.7m continue to anchor the overall revenue, accounting to 56.4% of total revenue in 1QFY22, followed by sales to Japan at RM15.9m (34.9% of total revenue), Australia at RM1.8m (4.0%) and other countries at RM2.1m (4.7%). We note that export towards the Europe region may remain dormant and we expect local sales to remain as the biggest contributor in quarters ahead.

• Moving forward, SLP will be targeting to bring its utilisation rate back to pre-Covid- 19 levels, which is at around 75.0%. Local sales growth will be backed by the recovery in economic activities as the country entered into the endemic phase, while the Japanese market will be boosted by the upgrade of economic growth to +3.2% YoY (from +2.2% YoY) in 2022.

• Resin prices is expected to stay afloat, premised to the elevated crude oil prices that was stemmed by the on-going geopolitical tension between Russia and Ukraine. The unabated supply chain disruption is also not favourable, particularly towards the export market as their export sales traditionally accounts to about 60.0% of overall revenue during pre-pandemic times. For now, we expect resin prices to stay above US$1,200/MT in 2022.

• We remain cautious on the back of the higher material prices, which is difficult to pass onto their customers. Also, the rising labour and utility costs may keep margins in check. With that in place, SLP remains committed to gradually adopt digitalisation and automation to improve manufacturing process in bid to keep margins in check.

Valuation & Recommendation

• Given that the reported earnings came below our expectations, we trimmed our earnings forecast by 5.5% and 3.7% to RM19.9m and RM22.3m for FY22f and FY23f respectively; taking into account of the margins compression which we expected to persists over the foreseeable future.

• We maintained our HOLD recommendation on SLP with a lower target price of RM0.82. Our target price is based on the assigned target PER of 13.0x to our revised FY22f EPS of 6.2 sen. At current price of RM0.90, we note that prospective dividend yields are fairly attractive at 6.7% and 7.2% for FY22f and FY23f respectively.

• Risks to our recommendation include the volatility in the global resin prices which affect production costs and margins. Foreign exchange fluctuation risk; although net forex exposure in USD is capped to about 5.0% as raw material costs is largely offset by export sales denominated in the same currency (close to 50.0% of total export revenue).

Source: Mplus Research - 11 May 2022