SLP Resources Bhd 
(July 22, RM1.51)
Maintain outperform with unchanged target price of RM1.76. Maxinflax-Bags capacity expansion of 1,800 million tonnes per annum (mmtpa) by the third quarter of financial year 2015 (3QFY15) is on track, with capacity set at 24,000mmtpa by end of FY15 and FY16.

This demand is driven by a Japanese customer (Askul Corp) which operates an online retailer of office products.

So far, two of the 10 Maxinflax auto packaging machines are being tested, while remaining machines, which also include six blown film lines, and six bag-making lines, are coming on stream in 3QFY15.

This is on schedule and already reflected in our FY15 and FY16 numbers.

We expect the 1,800mmtpa capacity to contribute an additional RM7 million to RM17 million to FY15 and FY16 revenues.

Maxinflax’s thin film expansion is at full speed as the machines are set to be commercialised in 3QFY15. We have already built in the co-extrusion blown film machine, which is set to arrive by 3QFY15, into our FY15 and FY16 estimates in our Initiating Coverage Report on March 16, 2015, as guided by management back then. 

We expect Maxinflax thin film to contribute 7.1% and 6.5% of FY15 and FY16 revenues of RM189.6 million to RM206.7 million. All in, the Maxinflax product line is contributing between 10.9% and 14.7% to FY15 and FY16 revenues. 

The new machinery for Maxinflax is meant to increase automation, minimising the workforce by 20 working staff for the end-line packing division, which can be deployed to other areas.

This will allow management to improve on cost savings going forward due to less reliance on labour and increased efficiency. 

So far, margins have improved from single digit 5.7% to 9.9% throughout FY14, to 10.8% in 1QFY15 on better sales mix and lower finance cost. 

Once the new lines and automation are up to full speed, we expect net margins to improve to 11.3% to 13.6% in FY15 and FY16, which is far superior compared with industrial packaging peers of 3.5% to 4.5% or other consumer packaging peers of 6.8% to 11.5%. 

The strengthening US dollar may continue to benefit SLP due to its US dollar-denominated export sales. 

To recap, as at 1QFY15 exports constituted 57% (vis-à-vis 46% in FY14) of total sales and this may continue to grow further assuming the favourable exchange rate remains.

We are currently assuming an average US dollar to ringgit exchange rate of RM3.65 to RM3.60 in FY15 and FY16.

However, the US dollar appears to have strengthened even further, hitting a high of RM3.81 on July 7, 2015, increasing the full-year US dollar to ringgit average to RM3.66. 

We may look to upgrade our earnings forecasts going forward should the favourable exchange rates continue to strengthen. Every 5% increase in the US dollar to ringgit will result in a 3.1% impact on FY16 earnings to RM28.9 million.

No changes to earnings as we are comfortable with our margins assumption and have accounted for the expansion plans.

However, we may review our earnings estimates if margins are better than expected in coming quarters, or if the US dollar to ringgit dynamics move beyond our assumptions. — Kenanga IB Research, July 22. 

This article first appeared in The Edge Financial Daily, on July 23, 2015.