SLP’s SLP Resources

25 May 2017

Affin Hwang Investment Bank Bhd (14389-U)

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Initiation: a premium plastic manufacturer

SLP is a premium plastic manufacturer that supplies proprietary ultra-

thin flexible-plastic packaging (FPP) products largely for the

consumer industry. Over 60% of SLP’s revenue is derived from

exports, with Japan and Australia being key markets. With new

capacity coming on-stream, SLP plans to penetrate the China market

with new products. We initiate coverage with a BUY call and TP of

RM2.87, based on a 26.0x 2018E PER, for upside potential of 14.7%.

Above average ASPs, low cost structure

SLP’s key strength lies in its manufacturing technology, innovation and in-

depth experience in producing premium packaging products that command

higher ASPs and require fewer raw materials. As a result, SLP commands

one of the highest margins (net margins in 2016: 15.1%) compared to other

plastic manufacturers. Moreover, the company has been exporting its

products to Japan, in particular, for more than 20 years, a testament of the

quality of its products. Domestically, it has a leading market share for

packaging of edible oil. Felda and Sime Darby are their key customers.

Capacity expansion underway for penetration into new markets

SLP’s recent investments (capex of RM13.4m in 2016 and RM11m in

2017E) for factory expansion and new-machine installations should

increase the group’s production capacity by 17% this year and 21% in

2018. With the increased capacity, management targets to grow the export

market, which is more profitable. In 2017, plans are to penetrate the

Chinese market with a new back sheet for baby diapers as well as the

hygiene segment.

Initiate coverage with BUY rating and target price of RM2.87

We like SLP as it has minimal competition. SLP exports most of its

products, mainly to the consumer sector, which is relatively resilient. The

expansion into new markets should be positive and underpins our 10.1%

EPS CAGR over 2017-20E. Moreover, we expect margin improvement

from lower material cost and better product mix. Initiate coverage with a

BUY rating and 12-month target price of RM2.87, based on 26x our 2018E

EPS (14.7% upside potential). Key risk: a spike in crude-oil prices.

Source: Company, Affin Hwang forecasts, Bloomberg

Earnings & Valuation Summary

FYE 31 Dec 2015 2016 2017E 2018E 2019E Revenue (RMm) 172.4 168.7 181.1 205.3 217.4 EBITDA (RMm) 37.6 35.1 36.4 41.7 42.4 Pretax profit (RMm) 34.8 29.3 32.7 37.7 38.2 Net profit (RMm) 27.2 25.4 28.4 32.7 33.2 EPS (sen) 11.0 10.3 9.6 11.0 11.2 PER (x) 22.7 24.3 26.1 22.7 22.4 Core net profit (RMm) 26.1 27.3 28.4 32.7 33.2 Core EPS (sen) 10.5 11.1 9.6 11.0 11.2 Core EPS growth (%) 4.8 -13.3 15.1 1.4 Core PER (x) 23.7 22.6 26.1 22.7 22.4 Net DPS (sen) 2.5 4.5 4.2 4.8 4.9 Dividend Yield (%) 1.0 1.8 1.7 1.9 2.0 EV/EBITDA (x) 11.9 16.8 18.9 16.5 16.0 ROE (%) 25.9 20.8 19.6 19.4 17.7 ROA (%) 20.8 17.2 16.8 16.9 15.5 Debt to equity ratio (x) 0.0 0.0 0.0 0.0 0.0 BPS (RM) 0.5 0.5 0.5 0.6 0.7 PBR (x) 5.4 4.7 4.6 4.2 3.8 Chg in EPS (%) - - - - Affin/Consensus (x) - - 0.8 0.8 -

Initiation of Coverage

SLP Resources SLPR MK; SLP Listing Market: Main Sector: Plastic Manufacturing

RM2.50 @ 24 May 2017 KLCI: 1774.95

BUY (initiate) Upside: 14.7%

Price Target: RM2.87 Previous Target: na

1,500

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May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17

(RM)AQRS MK KLCI

Price Performance

1M 3M 12M Absolute -7.4% 5.0% 8.7% Rel to KLCI -8.2% 0.7% -0.2%

Stock Data

Issued shares (m) 247.3

556.5/124.7 0.2

1.82-3.1 21.6%

0.50 4.50

25.25

588.8 Mkt cap (RMm)/(US$m) 618.3/143.8 556.5/131.5 Avg daily vol - 3mth (m) 0.1

0.2 0.14

52-wk range (RM) 2.0-3.1 0.68-1.05 Est free float 21.6% 21% BV per share (RM) 0.50 1.61 P/BV (x) 5.00 0.59 Net (cash)/ debt (RMm) 29.1

25.2525.25 175.7

Derivatives NA 8.0% Shariah Compliant Yes Nil Beta 0.61 No

Key Shareholders

Khoon Tee’s Family 40.0% Seang Chuan Khaw 15.5% Khoon Tee Khaw 10.6% Source: Affin, Bloomberg

Kevin Low

(603) 2146 7479 [email protected]

For enquiries purposes, please contact

Koh Sin Yee (603) 2146 7536

[email protected]

www.bursamids.com

mailto:[email protected]

http://www.bursamids.com/

25 May 2017


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Focus charts Fig 1: Continued growth in FPP market size

Source: Zion Market Research (US-based market research firm)

Fig 2: High capex between 2016-18E

0.9

6.8 6.8

1.0

7.0

13.4

11.0

13.5

7.0

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

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6

8

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16

2011 2012 2013 2014 2015 2016 2017E 2018E 2019E

RM mn

Capex Capex/Revenue

Source: Company, Affin Hwang forecasts

Fig 3: Revenue and net profit growth

0

5

10

15

20

25

30

35

0

50

100

150

200

250

300

2011 2012 2013 2014 2015 2016 2017E 2018E 2019E

RM mn

Revenue (LHS) Net profit (RHS)


Fig 4: SLP vs other manufacturers’ net profit margin (2016)

15.1% 15.1%

6.6%

7.8%

10.9%

0%

2%

4%

6%

8%

10%

12%

14%

16%

SLP Daibochi SCGM Thong Guan Scientex

%

Source: Companies

Fig 5: Net cash with zero borrowings

0

10

20

30

40

50

60

70

2011 2012 2013 2014 2015 2016 2017E 2018E 2019E

RM mn

Cash Total debt


Fig 6: DPS expected to rise with earnings

67%

52%

44%40%

23%

44% 44% 44% 44%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0%

10%

20%

30%

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50%

60%

70%

80%

2011 2012 2013 2014 2015 2016 2017E 2018E 2019E

sen

Divided payout ratio (LHS) DPS (RHS)


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Investment Thesis

Strong Competitive Advantage

Innovation of niche products

One of the key strategies of SLP is the innovation of niche products to enjoy

better margins. The group has its own formulation, machinery and

processing knowledge that allows it to manufacture customized products

that command higher profit margins. With the rising cost of packaging, the

group has successfully helped clients reduce the cost of packaging by

manufacturing thin-gauge plastic products.

The group’s MaxInflax products have “ultra-thin” thickness that uses fewer

raw materials while maintaining optical and functional performance

compared to thicker bags or film. Products include LD/LLDPE kitchen bags

below 15 microns (conventional kitchen bags c.30 microns), LD/LLDPE

tubing rolls as low as 10 microns (conventional tubing rolls c.18 microns),

and HDPE slicing film below 8 microns (conventional slicing film c.10-12

microns).

SLP has registered its thin-gauge plastic products under the trademark

MaxInflax. The group’s competitive advantage lies in producing thin-gauge

plastic packaging products without compromising quality.

Market leader in the packaging for edible oil

SLP is a major supplier of plastic packaging products for edible oil,

supplying companies like Felda and Sime Darby. In the early days, plastic

packaging for edible oil was done manually; however, manual packaging

has become costlier and machines have replaced labour for oil packaging.

As machines run at high speeds, the plastic used has to withstand the

pressure of oil flow from the oil reservoir to the oil pack. The leakages for

plastic-packed edible oil were typically 2.8/100 bags in the early days, but

SLP has successfully manufactured a special formulated oil pack that

minimizes oil leakages (0.0018/100 bags).

SLP has undergone the 9th revision to its specially formulated oil pack since

its first formulation, and the thickness of the oil pack has decreased from

120 microns to 75 microns. The group currently has around a 70-75%

market share of plastic packaging for edible oil in Malaysia.

Focus on R&D to sustain lead

SLP’s strength lies in its ability to develop equipment accessories to

facilitate production flow. The group’s innovative auto-folding machine is the

only machine in the market that is able to produce an individual fold from a

bundle of die-cut bags. Management is in the process of applying for a

patent for its auto-folding machine.

Another of SLP’s innovations is high-quality graphic printing on 10 grams

per square metre (GSM) back sheets for baby diapers. Management has

guided that many back sheet producers are unable to have high-quality

printing on the back sheet, but SLP is capable of handling high-quality

process-colour printing with its high-speed rotogravure printers.

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SLP also has innovated slicing film with a two-sided corona treatment for

cement companies. The group produces a thin-gauge inner sleeve that is

used in cement paper sacks to allow for the removal of air from the sack but

prevent water from entering the sack. The group’s clients include SIAM

Cement Group and YTL Cement.

Steady global plastic packaging growth

The plastic packaging industry is robust, driven by increasing demand from

the Asia Pacific region. Expansion of the food and beverages market, which

is the largest application of flexible packaging, is expected to fuel the growth

of the market for flexible packaging products (FPP). Rising consumer

preferences towards lightweight, durable and highly aesthetic flexible

packaging are also expected to increase demand for FPP.

Fig 1: Global plastic packaging market size, 2014-20E

Source: Zion Market Research (US-based independent market research firm), Affin Hwang

A study done by Zion Market Research, an independent market research

company based in the US, indicates that global demand for plastic

packaging was valued at USD270bn in 2014 and is expected to reach

USD375bn in 2020, for a CAGR of 4.8% between 2015 and 2020.

Asia Pacific is expected to be the fastest-growing market for plastic

packaging products due to increase in consumption on the growing middle

income groups in China and India.

Expansion into China market

SLP is expanding production capacity by 42% to 34,000 tons/year by 2018

from the current 24,000 tons/year, in anticipation of penetrating the China

market. China is an attractive market as the China Government has

abolished the decades-long one-child policy. As such, we expect the plastic

packaging business to grow as consumption increases due to higher

population growth and with China transforming itself into a consumption-

based economy.

The first products that the group plans to export to China are back sheets for

breathable baby diapers. Traditionally, the back sheet used for baby diaper

is 18-22GSM; however, the group has successfully manufactured back

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sheets that are as thin as 10GSM using its own formulation and machinery.

Thinner back sheets offer higher comfort for infants and lower raw material

costs for SLP.

Management is planning to export 50 tonnes of back sheets to China once

all the machines are installed. As of Dec 2016, the group’s new factories

were completed and a few new machines were installed. It is currently

setting up the upstream facilities.

Japan: a significant export market

Between 2013 and 2016, export revenue derived from Japan (as a

percentage of total revenue) increased from 25.2% to 40.8%

Fig 2: Revenue contribution from Japan as a % of total SLP revenue

25.2%

30.7%

39.1%40.8%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

2013 2014 2015 2016

Source: Company, Affin Hwang

Japanese households consume a lot of plastic packaging products as they

repack their groceries into daily or weekly portions after their shopping trips.

SLP exports kitchen bags, Mizukiri bags and multi-layer garbage bags to

Japan.

Fig 3: Examples of Mizukiri bags Fig 4: Examples of Mizukiri bags

Source: Company Source: Company

Malaysia: cost production is lower

Although China has traditionally been Japan’s largest import partner for

plastic products, the rising cost of manufacturing in China in recent years

has resulted in Japan switching orders to Southeast Asia. Malaysia and

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Vietnam have thus been key beneficiaries due to stable manufacturing cost

vis-a-vis Thailand and Indonesia.

Fig 5: Japan: plastic product import share (%)

Source: World Integrated Trade Solutions (WITS)

Long, steady relationship with Japanese customers

The founder of the group, Khaw Khoon Tee, has established a strong

relationship with his Japanese clients. In 1991, the group sent its first

shipment of Mizukiri bags to Japan. Mizukiri bags are perforated with drain

holes so that excessive fluid during food disposal is easily removed.

Demand for kitchen bags from Japan will likely remain strong as kitchen

bags are consumer staples goods.

New opportunities in hygiene sector

Increasing demand for flexible packaging in the hygiene industry is expected

to be a key growth driver. Several regulations are being introduced and

implemented across the world relating to the packaging of pharmaceutical

products due to the maintenance of cleanliness and reduction of fraudulent

drugs. SLP manufactures hygiene products like medical polysleeves for

catheters.

The group has standardized product quality across all the markets it exports

to and adheres strictly to customer requirements. Working with its Japanese

clients has enabled SLP to improve their products’ quality. Potential demand

for flexible packaging for the hygiene sector should benefit SLP as the

company has the expertise to produce high-quality packaging products for

hygienic and medical purposes.

Capacity expansion to support stronger

demand

Fig 6: Rising capex for new production lines should drive growth

25 May 2017


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0.9

6.8 6.8

1.0

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7.0%

8.0%

9.0%

0

2

4

6

8

10

12

14

16

2011 2012 2013 2014 2015 2016 2017E 2018E 2019E

RM mn

Capex Capex/Revenue


SLP’s annual capex increased substantially over 2014-16. Having identified

the growth potential of the FPP market in China and the hygiene industry,

SLP invested in a new plant adjacent to the current factory and installed a

new printing press in 2016. The group has budgeted around RM11m this

year and RM12-15m in 2018 to meet increasing demand.

SLP has proposed a private placement to raise gross proceeds up to

RM40.32m, of which RM27.5m would be for capex, RM12.0m for working

capital and RM0.8m for operating expenses.

Automation to mitigate labor issues

Increasing labour cost caused by the implementation of minimum wages has

been a challenging factor for the plastic manufacturers industry in Malaysia.

As a result, SLP is focusing on investing in automation by increasing auto-

pack machines to reduce labour dependency.

New capex would push capacity up by 42% by 2018E

SLP is already operating near full capacity at a utilization rate of 75%. With

the expansion, the group estimates that annual production capacity would

increase from 24,000 tons in 2016 to 28,000 tons in 2017 and 34,000 tons in

2018. With the targeted expansion, we believe that SLP’s increased capacity

would be well taken up.

Investment in capex allows tax benefits

Separately, SLP’s effective tax rate decreased from 21.8% in 2015 to 13.1%

in 2016. Investment in capex allowed the group to enjoy tax benefits. Moving

forward, the tax rate is estimated to remain at this level (c. 13%) over the

near term as the company is still investing in machinery to ramp up

production capacity.

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Financial Analysis and Forecasts

Fig 7: SLP’s solid revenue and profit track record

0

5

10

15

20

25

30

35

0

50

100

150

200

250

300

2011 2012 2013 2014 2015 2016 2017E 2018E 2019E

RM mn



Export revenue growth to mitigate domestic market slowdown

In 2016, the group recorded slightly lower revenue of RM168.7m, (-2.2%

yoy). The decrease in revenue was mainly due to the slowdown in economic

growth in Malaysia, which resulted in weaker demand for the group’s plastic

packaging and other polymer products. Revenue from the domestic market

decreased by 8.5% in 2015-16, and accounted for 38% of group revenue in

2016.

The group’s major products sold to Malaysian markets are comprised largely

of FPP bags and films for F&B products as well as the hygiene sector. A

slowdown in consumer spending and sluggish income growth had a

significant impact on the net sales of the group. Recognizing the continued

economic challenges in Malaysia, the group has been increasing exports to

overseas markets.

Fig 8: Revenue contribution as a percentage of total revenue

54.0%

30.7%

5.8% 6.0%3.4%

40.9%39.1%

8.6%7.1%

4.5%

38.2%40.8%

9.2%6.3% 5.6%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Malaysia Japan Australia Others (NZ, US,SG)

EuropeanCountries

2014 2015 2016

Source: Affin Hwang, Company

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Key export markets report growth in 2016

In 2016, the group’s revenue derived from Japan increased by 2.1%, whilst

revenue derived from Australia increased by 4.9% in 2015-16. SLP’s clients

from Australia include Petit Bateau, Katies, and David Jones. Orders from

Australia are likely to remain strong as fashion brands are willing to invest in

better-quality fashion bags as packaging products carry the brand image. To

serve this market, SLP has a few different types of fashion bags, including a

glue-patch handle bag, soft-loop handle bag and punched-out handle bag.

China, a key driver in 2017E

Starting this year, SLP will venture into the Chinese market. China’s recent

decision to end the decades-long one-child policy should result in higher

population growth, providing opportunities for businesses that manufacture

or supply infant-related products. Hence, we favour the group’s move to

produce back sheets for diaper manufacturers in China.

Resilient demand as products serve the consumer segment

We foresee the demand for the group’s FPP products to remain resilient

given that it supplies plastic packaging products to F&B companies as well

as the hygiene sector.

Raw material costs stabilizing

We expect the operating environment to remain favourable due to: i)

stabilizing raw material prices; and ii) the weak RM against the US$.

Lower resin prices typically improve the company’s gross margin. The price

of plastic resin experienced a significant drop in 2014. Despite the slight

increase in resin prices in recent months, the price is still significantly lower

compared to its peak in 2H14, thus benefitting plastic manufacturers like

SLP.

Fig 9: US Producer Price Index Plastic Resins (pts)

150

170

190

210

230

250

270

Jan-0

6

Jun-0

6

Nov-

06

Apr-

07

Sep-0

7

Feb

-08

Jul-08

Dec-

08

May-

09

Oct-09

Mar-

10

Aug-1

0

Jan-1

1

Jun-1

1

Nov-

11

Apr-

12

Sep-1

2

Feb

-13

Jul-13

Dec-

13

May-

14

Oct-14

Mar-

15

Aug-1

5

Jan-1

6

Jun-1

6

Nov-

16

Apr-

17

Source: US Bureau of Labour Statistics

IHS, a research-based consulting firm in Houston, Texas, expects global

commodity resin prices to remain relatively low in the near term. Low-priced

crude oil has lowered commodity resin prices since mid-2014. According to

SLP’s management, the plastic resin price is currently USD1,180–1,200/MT.

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We are aware that any increase in the resin price would likely reduce SLP’s

earnings since plastic resin makes up a major portion of total cost. Hence,

we include a sensitivity analysis on the effect of resin prices on SLP’s

earnings.

Fig 10: Sensitivity analysis on resin price vs earnings (2017E)

Resin price (USD) FY17E Net profit (RM m) % change in net profit

20% 1416 6.9 -75.7%

15% 1357 12.3 -56.8%

10% 1298 17.7 -37.8%

5% 1239 23.1 -18.9%

1% 1192 27.4 -3.8%

Base 1180 28.4 0.0%

-1% 1168 29.5 3.8%

-5% 1121 33.8 18.9%

-10% 1062 39.2 37.8%

-15% 1003 44.6 56.8%

-20% 944 50.0 75.7%

Source: Affin Hwang estimates and forecasts

As our sensitivity analysis table indicates, our base-case forecast for 2017E

net profit is RM28.4m, assuming a resin price of USD1,180/MT. We

estimate that a 5% increase in the resin price could reduce our net profit

forecast to RM23.1m, while a 5% decrease could increase our forecast to

RM33.8m.

Fig 11: Sensitivity analysis on resin price vs earnings (2018E)

Resin price (USD) FY18E Net profit (RM m) % change in net profit

20% 1500 8.4 -74.3%

15% 1438 14.5 -55.7%

10% 1375 20.6 -37.2%

5% 1313 26.7 -18.6%

1% 1263 31.5 -3.7%

Base 1250 32.7 0.0%

-1% 1238 33.9 3.7%

-5% 1188 38.8 18.6%

-10% 1125 44.9 37.2%

-15% 1063 51.0 55.7%

-20% 1000 57.1 74.3% Source: Affin Hwang estimates and forecasts

We assume a USD1,250/MT resin price forecast for our 2018 base-case net

profit forecast. We estimate that a 5% increase in the resin price could

reduce our net profit forecast to RM26.7m, while a 5% decrease could

increase our net profit forecast to RM38.8m.

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Stronger dollar positive for the company

Fig 12: USD/MYR

2.5

3.0

3.5

4.0

4.5

5.0

Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Jan-2017

Source: Bloomberg

The weakening of the MYR against the USD is favourable for SLP since

approximately 60% of its sales are in USD. As such, the group has been

able to enjoy margin expansion from the stronger USD.

We expect the USD:MYR to remain around RM4.00-4.20 in 2017; however,

we are cognizant that any fluctuation in the exchange rate would have an

impact on the group’s earnings. As such, we include a sensitivity analysis to

study the impact of exchange rates on earnings.

Fig 13: Sensitivity analysis on USDMYR vs earnings (2017-18E)

USDMYR (17E) 17E Revenue (RM m) 17E Net profit (RM m) USDMYR (18E) 18E Revenue (RM m) 18E Net profit (RM m)

20% 5.0 203.8 45.9 20% 4.8 231.0 52.5

10% 4.6 192.5 37.2 10% 4.4 218.2 42.6

5% 4.4 186.8 32.8 5% 4.2 211.7 37.7

Base 4.2 181.2 28.5 Base 4.0 205.3 32.8

-5% 4.0 175.5 24.1 -5% 3.8 198.9 27.8

-10% 3.8 169.8 19.8 -10% 3.6 192.5 22.9

-20% 3.4 158.5 11.1 -20% 3.2 179.7 13.0 Source: Affin Hwang estimates and forecasts

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Quarterly trends

Fig 14: Quarterly revenue and net profit

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

38

39

40

41

42

43

44

45

46

47

Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017

RM mn


RM mn

Source: Affin Hwang, Company

SLP experienced declining revenue in 2016 due to a slowdown in the

Malaysia economy and stricter credit control imposed on customers. Moving

forward, SLP plans to focus on the export segment and increase operating

margins.

Improving margins on higher efficiency

Revenue increased slightly by 2.9% yoy in 1Q17, whilst PBT improved

significantly by 9.6% yoy to RM6.8m. Moving forward, we expect the group’s

margins to increase gradually.

Fig 15: 2016 net profit margins: SLP vs other manufacturers

15.1% 15.1%

6.6%

7.8%

10.9%

0%

2%

4%

6%

8%

10%

12%

14%

16%

SLP SCGM Daibochi Thong Guan Scientex

%

Source: AffinHwang, Companies

SLP and SCGM (Not rated) have the highest net profit margins compared to

their peers in the plastic manufacturing industry. SLP’s higher margins are

mainly due to the group’s efforts in delivering MaxInflax products that use

fewer raw materials and are priced at a premium.

Moreover, both SLP and SCGM supply the consumer sectors. Traditionally,

plastic products for the consumer sector carry higher margins compared to

the industrial sector. SLP, a premium plastic manufacturer, also has higher

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bargaining power when it comes to negotiating ASPs compared to

commodity plastic manufacturers.

Export markets are more profitable

SLP’s products that are exported, like kitchen bags and premium fashion

bags, also carry higher margins compared to products that are sold locally

(plastic packaging for edible oil and cement film). As the group is planning to

focus more on the export market, we think that SLP’s margins (2016 net

profit margin: 15.1%) will remain above 15.0%.

Revenue growth of 7.4% yoy for 2017E and 13.3% yoy for 2018E

We expect SLP to achieve 13.3% yoy revenue growth in 2018 due to:

(i) higher exports to overseas markets (Japan, Australia and

European countries);

(ii) new revenue streams from the Chinese market and the hygiene

sector; and

(iii) higher efficiency and capacity expansion.

Fig 16: SLP’s EPS (sen)

3.0

3.8

4.54.9

11.0

10.3

9.6

11.0 11.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2011 2012 2013 2014 2015 2016 2017E 2018E 2019E


Fig 17: Strong net cash position (RMm)

0

10

20

30

40

50

60

70

2011 2012 2013 2014 2015 2016 2017E 2018E 2019E

RM mn

Cash Total debt


The group has a healthy balance sheet, as seen in its strong net cash

position and zero gearing (2016 net cash: RM29.1m). The group’s healthy

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FCFF of RM14.6m in 2016 supported its high dividend payout of 44%, which

we expect to continue.

Scenario analysis

Impact of delay in capacity expansion on earnings

We are cognizant that any delay in the group’s capacity expansion might

have a negative impact on the group’s earnings growth. Hence, we include a

sensitivity analysis that shows the impact of delays in capacity expansion on

SLP’s mid- to long-term earnings.

Fig 18: Sensitivity analysis on capacity expansion, vs. earnings

Sensitivity Analysis - Capacity expansion

2015 2016 2017E 2018E

Current Assumptions (tons/annual) 24,000 24,000 28,000 34,000

Revenue (RM m) 172.4 168.7 181.1 205.3

Net profit (RM m) 27.2 25.4 28.4 32.7

Revised Assumptions (tons/annual) 24,000 24,000 26,000 26,000

Revenue (RM m) 172.4 168.7 168.2 168.2

Net profit (RM m) 27.2 25.4 27.1 25.9

Base case

Bear case

Source: AffinHwang estimates and forecasts

In the event that SLP’s expected annual production level declines from

28,000 tons to 26,000 tons in 2017, we believe the group’s revenue could

decrease from RM181.1m to RM168.2m and net profit to decrease from

RM28.4mn to RM27.1m.

In a worst-case scenario where the group does not expand its production

capability, we still think the group would maintain current annual production

of 24,000 tons with utilization rate of 75% as there would still be demand for

FPP from its existing customers.

Valuation and Recommendation

Resilient business model

SLP has a highly resilient business model as it manufactures FPP for the

consumer and hygiene segments. The company is benefiting from stricter

regulations that are being implemented globally relating to the packaging of

pharmaceutical products. The company is also focusing on entering the

Chinese market that should see huge demand for better-quality plastic

packaging materials. Hence, we believe that the group will be able to grow

earnings gradually over the next few years.

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Valuations

Fig 19: Historical PER chart

0.0

5.0

10.0

15.0

20.0

25.0

Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Jan-2017

+1SD: 18.1x

Avg: 11.6x

-1SD: 5.0x

Source: Bloomberg, Affin Hwang forecasts

Fig 20: Peer comparison table

Mkt Cap

USD m CY17E CY18E CY17E CY18E CY17E CY18E CY17E CY18E CY17E CY18E CY17E CY18E

SLP Resources* SLPR MK Equity 143.8 Dec 26.2 22.8 19.0 16.6 4.7 4.2 1.7 1.9 19.6 19.4 -13.3 15.1

Daibochi DPP MK Equity 154.4 Dec 21.4 18.4 14.2 11.4 3.3 3.0 2.3 3.0 17.0 17.6 30.4 16.7

SCGM Bhd SCGM MK Equity 132.7 Apr 24.4 20.8 16.2 12.1 3.8 4.1 2.0 4.1 16.5 19.5 20.6 17.1

Thong Guan Industries TGI MK Equity 127.5 Dec 7.5 10.8 4.8 4.5 1.1 1.6 2.9 1.6 16.4 9.3 16.8 -29.9

Scientex SCI MK Equity 850.6 Jul 10.4 40.5 7.3 7.1 2.1 8.2 8.2 8.2 22.4 5.6 14.2 -74.2

ROE (%) EPS growth (%)Company Ticker Year end

PER (x) EV/EBITDA P/BV Div Yield (%)

Source: Affin Hwang forecasts, Bloomberg; based on prices as of 24 May 2017

Initiate coverage with BUY and target price of RM2.87

Although there are a few plastic manufacturers in Malaysia, SLP does not

currently face any direct competition. SLP exports most of products, mainly

to the consumer sectors. It is also considered a premium plastic

manufacturer, with some products used as high-end fashion bags.

Hence, we think SLP deserves a higher PER relative to its peers (Daibochi

[not rated]: 2018E PER: 18.4x and SCGM [not rated]: CY18E PER: 20.8x),

as SLP’s products command higher ASPs and they enjoy a competitive

advantage in producing plastic products that are ultra-thin. This should

provide the group with an added advantage if the resin price continues to

increase.

We derive our 12-month target price of RM2.87 using a 2018E PER of

26.0x. With upside potential of 14.7%, we initiate coverage with a BUY call.

Dividend payout ratio expected to be 40%+ over next few years

SLP has consistently paid out annual dividends for the past 7 years. Its

dividend payout ratio was more than 40% in 2011-16, except in 2015 (23%)

when the group was investing heavily in the new plant as well as machinery.

The consistent dividend payout should continue to be backed by the

strength of its operating cash flow (RM34.5m in 2017E) and balance sheet

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(2017E cash of RM52.5m). Prospects for a higher DPS payout on stronger

earnings thus appear increasingly likely, in our view.

Fig 21: DPS and payout ratio

67%

52%

44%40%

23%

44% 44% 44% 44%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0%

10%

20%

30%

40%

50%

60%

70%

80%

2011 2012 2013 2014 2015 2016 2017E 2018E 2019E

sen

Divided payout ratio (LHS) DPS (RHS)


SWOT

Strength

Competitive advantage in thin-gauge plastic products

Limited competition as it manufactures customized products

Demand from overseas markets remains strong

Strong net cash position and zero gearing level

Weakness

Slowdown in Malaysia market affects revenue

Weakening of USD

Increased resin price

Opportunities

Expansion into Chinese market provides huge potential

Hygiene companies demand for better-quality plastic packaging

products

Threats

Clients opt for more environmentally-friendly packaging

Risks Risks to our call include: i) spikes in crude-oil prices; ii) weakening of USD

vis-à-vis the RM; iii) weaker demand from Malaysia clients; iv) clients opt for

more environmentally friendly packaging; and v) further increases in the

minimum wage.

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Appendix

Company background

From humble beginnings as a manufacturer of ice-tube plastic packaging for

the domestic market back in 1989, SLP has grown to become a niche

manufacturer of over 1,000 plastic packaging products and films for

domestic and international markets, including Japan, Norway, the United

Kingdom, Australia, Denmark and Germany, as well as other emerging

market such as Indonesia, Thailand and Singapore.

The executive chairman and founder, Khaw Khooon Tee, was responsible

for SLP’s transformation from a small plastic packaging products maker into

a niche manufacturer of high-quality and innovative plastic packaging

products. He was also responsible for the company’s foray into the quality-

stringent Japanese market.

The group’s revenue is derived from (i) manufacturing for plastic packaging

products for domestic and international markets, and (ii) trading of resin.

SLP was listed on Bursa Malaysia Securities Berhad on 12 March 2008.

SLP has three wholly owned subsidiaries: Siniplas Holding Sdn Bhd,

Siniplas Sdn Bhd and SLP Green Tech Sdn Bhd.

SLP’s Revenue Breakdown

Source: Company

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SLP’s Production Capabilities

Source: Company

SLP’s Product Range

Source: Company

SLP’s Distribution Network

Source: Company

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Experienced management team

The current management team pioneered the setting-up of the group’s new

production lines through a Technology Transfer Agreement with Maruzen

Kako Co Ltd of Japan and Okahata Sangyo Co Ltd of Japan. SLP also

introduced other innovative products, including Vertical-Form-Fill-Seal

(VFFS) films for the packaging of edible palm oil, antibacterial plastic

sleeves and newspaper wrapping films, NCPP wrapping films for sanitary

packaging and shrink film for food packaging. The group is committed to

innovating one new product every year to cater to customer needs.

The management team, led by the current Managing Director, Mr. Kelvin

Khaw, is focusing on expanding the customized products segment. After

more than 20 years in the plastic manufacturing industry, the group is aware

that product innovation commands better profit margins. Companies that

manufacture commodity plastic products like plastic cups and plates face

fierce competition, as there are many other players in the industry.

Increases in the cost of manufacturing, including higher electricity tariffs and

increases in labour costs, have resulted in lower profit margins for plastic

manufacturers. Hence, SLP plans to remain a “formulation player” that

manufactures customized plastic packaging products.

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SLP– FINANCIAL SUMMARY Profit & Loss Statement Key Financial Ratios and Margins

FYE 31 Dec (RMm) 2015 2016 2017E 2018E 2019E FYE 31 Dec (RMm) 2015 2016 2017E 2018E 2019E

Revenue 172.4 168.7 181.1 205.3 217.4 Growth

Operating expenses (134.9) (133.6) (144.7) (163.6) (175.0) Revenue (%) -1.2% -2.2% 7.4% 13.3% 5.9%

EBITDA 37.6 35.1 36.4 41.7 42.4 EBITDA (%) 94.8% -6.4% 3.6% 14.5% 1.6%

Depreciation (3.9) (4.0) (3.7) (4.0) (4.2) Core net profit (%) 114.6% 4.8% 4.0% 15.1% 1.4%

EBIT 33.7 31.2 32.7 37.7 38.2

Net interest expense (0.0) (0.0) 0.0 0.0 0.0 Profitability

Associates' contribution 0.0 0.0 0.0 0.0 0.0 EBITDA margin (%) 21.8% 20.8% 20.1% 20.3% 19.5%

Exceptional gain/(loss) 9.7 0.7 0.0 0.0 0.0 PBT margin (%) 20.2% 17.4% 18.1% 18.4% 17.6%

Pretax profit 34.8 29.3 32.7 37.7 38.2 Net profit margin (%) 15.8% 15.1% 15.7% 15.9% 15.3%

Tax (7.6) (3.8) (4.3) (4.9) (5.0) Effective tax rate (%) 21.8% 13.1% 13.1% 13.1% 13.1%

Minority interest 0.0 0.0 0.0 0.0 0.0 ROA (%) 20.8% 17.2% 16.8% 16.9% 15.5%

Net profit 27.2 25.4 28.4 32.7 33.2 Core ROE (%) 24.8% 22.3% 19.6% 19.4% 17.7%

ROCE (%) 30.1% 24.1% 21.5% 21.4% 19.6%

Balance Sheet Statement Dividend payout ratio (%) 22.8% 43.8% 43.8% 43.8% 43.8%

FYE 31 Dec (RMm) 2015 2016 2017E 2018E 2019E

Fixed assets 52.3 63.3 70.7 80.2 83.0 Liquidity

Other long term assets 0.3 0.2 0.2 0.2 0.2 Current ratio (x) 4.3 5.6 6.8 6.6 7.2

Total non-current assets 52.6 63.5 70.9 80.4 83.3 Op. cash f low (RMm) 27.6 28.0 34.5 29.4 33.0

Free cashflow (RMm) 20.6 14.6 23.5 15.9 26.0

Cash and equivalents 26.7 29.1 52.5 54.0 65.5 FCF/share (sen) 33.3 23.7 31.6 21.4 35.0

Stocks 25.5 30.5 24.2 28.9 31.1

Debtors 36.1 30.6 34.6 39.5 42.3 Asset management

Other current assets 0.1 0.9 0.9 0.9 0.9 Debtors turnover (days) 76.5 66.1 69.7 70.2 71.0

Total current assets 88.4 91.1 112.3 123.4 139.8 Stock turnover (days) 75.4 97.5 71.4 75.3 75.6

Creditors turnover (days) 43.9 47.4 44.2 44.9 43.3

Creditors 14.8 14.8 15.0 17.2 17.8

Short term borrow ings 2.1 0.0 0.0 0.0 0.0 Capital structure

Other current liabilities 3.4 1.5 1.5 1.5 1.5 Net gearing (%) (90.3) (114.3) (184.5) (165.1) (197.4)

Total current liabilities 20.4 16.3 16.5 18.7 19.3 Interest cover (x) 0.0 0.0 0.0 0.0 0.0

Long term borrow ings 0.0 0.0 0.0 0.0 0.0

Other long term liabilities 6.8 7.1 7.1 7.1 7.1 Quarterly Profit & Loss

Total long term liabilities 6.8 7.1 7.1 7.1 7.1 FYE 31 Dec (RMm) 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17

Shareholders' Funds 113.8 131.2 159.6 178.0 196.7 Revenue 44.7 42.2 41.0 40.9 46.0

Minority interests 0.0 0.0 0.0 0.0 0.0 Operating expenses 38.6 33.2 30.5 29.2 37.5

EBITDA 6.1 8.9 10.4 11.7 8.5

Cash Flow Statement Depreciation (1.0) (1.0) (3.0) (1.0) (1.2)

FYE 31 Dec (RMm) 2015 2016 2017E 2018E 2019E EBIT 5.1 7.9 7.4 10.7 7.3

EBIT 33.7 31.2 32.7 37.7 38.2 Net int income/(expense) 0.0 0.0 0.0 0.0 0.1

Depreciation & amortisation 3.9 4.0 3.7 4.0 4.2 Associates 0.0 0.0 0.0 0.0 0.0

Working capital changes (2.5) 0.6 2.4 (7.3) (4.4) Forex gains 0.0 0.0 0.0 0.0 0.0

Cash tax paid 0.0 0.0 0.0 0.0 0.0 Exceptional gain/(loss) 1.2 (0.6) (0.5) (1.9) (0.5)

Others (7.4) (7.7) (4.3) (4.9) (5.0) Pretax profit 6.2 7.3 6.9 8.8 6.8

Cashflow from operation 27.6 28.0 34.5 29.4 33.0 Tax (1.2) (1.2) (0.7) (0.7) (1.7)

Capex (7.0) (13.4) (11.0) (13.5) (7.0) Minority interest 0.0 0.0 0.0 0.0 0.0

Disposal/(purchases) 0.0 0.0 0.0 0.0 0.0 Net profit 5.1 6.1 6.2 8.1 5.1

Others 0.0 0.1 0.0 0.0 0.0

Cash flow from investing (7.0) (13.3) (11.0) (13.5) (7.0) Margins (%)

Debt raised/(repaid) (1.1) (2.1) 0.0 0.0 0.0 EBIT 11.3% 18.8% 18.2% 26.2% 15.9%

Equity raised/(repaid) 0.0 0.0 0.0 0.0 0.0 PBT 14.0% 17.3% 16.9% 21.5% 14.9%

Dividends paid (6.2) (11.1) (12.4) (14.3) (14.5) Net profit 11.4% 14.4% 15.1% 19.7% 11.1%

Others 0.0 (0.0) 12.4 0.0 0.0

Cash flow from financing (7.3) (13.2) (0.1) (14.3) (14.5)

Free Cash Flow 20.6 14.6 23.5 15.9 26.0 Source: Company, Affin Hwang forecasts

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Equity Rating Structure and Definitions

BUY Total return is expected to exceed +10% over a 12-month period

HOLD Total return is expected to be between -5% and +10% over a 12-month period

SELL Total return is expected to be below -5% over a 12-month period

NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as

a recommendation

The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months.

OVERWEIGHT Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months

NEUTRAL Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months

UNDERWEIGHT Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months

This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) (“the Company”) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the Company’s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Company’s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company. The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) A Participating Organisation of Bursa Malaysia Securities Berhad 22nd Floor, Menara Boustead, 69, Jalan Raja Chulan, 50200 Kuala Lumpur, Malaysia. T : + 603 2146 3700 F : + 603 2146 7630 [email protected] www.affinhwang.com

SLP’s SLP Resources

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