SLP Resources Bhd
(May 11, RM1.04)
Maintain outperform with target price of RM1.27: The first quarter of financial year 2015 (1QFY15) net profit of RM4.5 million came within our expectations at 23% of full-year forecast. As expected, no dividend was declared.

Based on quarter-on-quarter, SLP’s top line was up by 2.6% mainly due to the improvement in the trading portion as resin price has improved on the back of a slight uptick in crude oil prices since November 2014.

The quarter also enjoyed improved operating profit margins by 3.5 percentage points (ppt) to 14.6% from a better sales mix, and lower finance cost (-45%) as the group is paring down its borrowings.

As a result, SLP’s net profit increased by 11.9%.

Year-on-year, top line was down by 6.8% to RM41.4 million mainly due to the trading segment as resin prices were low due to weaker crude oil prices.

However, the lower cost of raw materials due to lower resin prices and SLP’s initiative to change its sales mix by increasing flexible plastic packaging products boosted profit before tax margins by 6.9ppt to 14.6%. That, coupled with lower financing cost (-50%) due to similar reasons mentioned above, helped to increase net profit by 75.9%.

We find that SLP is ramping up its MaxInflex-Bags, adding an additional 1,800 tonnes per annum on top of the already planned 1,800 tonnes per annum while contributions should accrete immediately after production commences in July or August 2015.

We make no changes to our FY15/FY16 forecasts on net proceeds of RM19.4 million to RM23.9 million, while we are estimating dividend gross yields of 3% to 3.7%.

Thus, we maintain “outperform” based on a targeted forward price-earnings ratio (PER) of 14.5 times on an average FY15/FY16 earnings per share of 8.8 sen.

We are partially rolling forward to FY16 to better encapsulate earnings contributions from capacity enhancements in 3QFY15.

Our applied PER is in line with the consumer packaging peer’s average of FY15/FY16 of 14.4 times.

We like SLP for its earnings excitement and it being one of the unwarranted cheapest consumer packaging players. — Kenanga Investment Bank Bhd, May 11

This article first appeared in The Edge Financial Daily, on May 12, 2015.