SLP’s margins likely to normalise from softer resin cost

KUALA LUMPUR: SLP Resources Bhd’s (SLP) margins have been projected to normalise by the second half of 2018 (2H18) from softer resin cost and a better product mix.

According to Affin Hwang Investment Bank Bhd (AffinHwang Capital), higher high-density polyethylene (HDPE) and low-density polyethylene (LDPE) prices could lead to higher raw material prices, given that HDPE and LDPE are approximately 80 per cent of SLP’s raw materials.

However, AffinHwang Capital was not overly concerned about the impact to SLP’s profitability, as the research firm believed the group’s niche products command higher margins.

“We expect the earnings before interest, tax, depreciation and amortisation (EBITDA) margin to normalise to 17.5 per cent by 2H18, from 15.7 per cent in financial year 2017 (FY17), premised on softer raw material prices, a better product mix and a temporary weakness in the ringgit,” it said.

Onestimates,AffinHwangCapital raised its earnings per share (EPS) forecasts by three per cent-19 per cent for FY18-20, to factor in higher revenue growth and higher margin expectations.

The research firm also raised its 12- month target price to RM1.50 per share, from RM1.33 per share previously, based on an unchanged FY19E price earnings ratio (PER) of 15-fold.

“We continue to like SLP for its expertise in thin-gauge plastic products, superior margins and compelling valuations of 13fold FY19E PER/three per cent yield.”