SLP Resources Bhd
(April 17, RM1.06)
Maintain outperform with a higher target price of RM1.27, from 91 sen previously: We recently met up with SLP’s management, and to our surprise there appears to be more demand for MaxInflax-Bags, prompting another capacity expansion of 1,800 tonnes per year by July/August this year.
This is driven by a new major customer who operates an online shopping site. Including its earlier known expansion plans and the new capacity, total production capacity for financial year 2015 (FY15) will rise by 18% year-on-year (y-o-y) to 24 million tonnes per year.
The capital expenditure (capex) for the expansion will be funded internally, given its strong net cash position and operational cash flow. The icing on the cake is margin expansion given lower-than-expected resin prices, favourable US dollar dynamics and higher average selling prices as the MaxInflax line is a high-margin product.
Hence, FY15/FY16E earnings are revised higher by 16.6% to 34.7%, implying one of the strongest growths among its consumer packaging peers. The increase in MaxInflax-Bags production comes in addition to the already known 1,800 tonnes per year rise for its MaxInflax-Thin Film segment.
Upon commercial production by July/August, we expect immediate contributions. MaxInflax is a cost savings packaging solution which has caught the attention of a new major customer who operates an online shopping site.
We are positive on the news as clearly SLP is hitting the right spot, namely the thin-gauge product which provides cost savings to customers. By end-2015, its total production capacity will increase by 18% y-o-y to 24,000 tonnes per year, of which MaxInflax will comprise 38% of total capacity.
Including expansion and maintenance capex, we expect the group to incur FY15 capex of RM14.5 million and FY16E of RM6 million. As at FY14, SLP is in a net cash position of RM10.2 million with RM25.2 million to RM26.6 million operating cash flow and thus, is expected to remain in a net cash position post expansion.
We expect net margins to improve going forward given: (i) better production mix (60% of conventional kitchen bags, which command mid-teens net margins against 40% of MaxInflax kitchen bags which carry high-teens net margins); (ii) lower raw material prices, particularly resins; and (iii) automation via auto-pack machines to reduce labour dependency.
This is due to the new capacity from MaxInflax-Bags while our FY15/FY16E net margin forecast has been revised upwards to 10.8% and 12.1% respectively (from of 9.6% and 10.1%) against 9.9% in the fourth quarter of FY14 due to the reasons mentioned above. Assuming a conservative 40% payout ratio, FY15/FY16 NPDS has been raised by 14.8% and 34.5% to 3.1 and 3.9 sen respectively post our earnings revision, yielding 3% and 3.7% respectively which is on par with the plastic and packaging sector average of 3.3%.
Consumer packaging is fetching better premiums to industrials as the former’s net margin is far superior to the latter’s. Consumer packaging players (SLP, Daibochi Plastic & Packaging Industries Bhd and SCGM Bhd) are trading at an average calendar year 2015 (CY15)/CY16E price earnings ratio (PER) of 14.4 times against its industrial packaging peers.
Maintain “outperform” call with a higher target price of RM1.27 (RM0.91 previously), based on targeted forward PER of 14.5 times (from 13.5 times) while we partly roll forward from FY15E to a revised CY15/CY16E earnings per share of 8.8 sen.
We raise our applied forward PER because SLP’s FY15E net profit margin of 10.8% is the second highest among its consumer packaging peers average of 10.2%, while SLP’s FY15E earnings growth of 59.8% is one of the highest among its peers. In fact, we are being conservative with valuations as they should be commanding a premium to the consumer packaging peer’s forward PER of 14.4 times.
We like SLP for its earnings excitement and it being one of the unwarranted cheapest consumer packaging players. — Kenanga Research, April 17
This article first appeared in The Edge Financial Daily, on April 20, 2015.