SLP lowered on higher raw material cost

PETALING JAYA: Affin Hwang Capital has downgraded SLP Resources Bhd to a “hold” call as higher raw material cost has negatively impacted the group’s bottom line.

“As we expect oil price to trend higher in the coming quarters, we decrease our earnings by 34% and 23% for 2017 and 2018,” the research house said in a report.

SLP’s Q2’17 revenue increased by 2.5% year-on-year (y-o-y), but its net profit decreased by 23.9% y-o-y, due to higher raw material costs.

The group’s earnings missed both Affin Hwang’s and the consensus estimates. SLP recorded a 1H17 net profit of RM9.7 million, which makes up 34% of Affin Hwang’s full year estimates and 26.5% of consensus estimates.

“The higher revenue was attributed to higher domestic sales of flexible plastic packaging products in line with higher demand for food packaging products from domestic customers. Nonetheless, the price of resin, a derivative of oil, had increased in tandem with higher oil price. This resulted in the lower Q2’17 ebitda (earnings before interest, tax, depreciation and amortisation) margin of 14.5% compared with 17.3% in Q2’16.”

It said SLP also faces fierce competition from other plastic manufacturers in Thailand and Vietnam, which resulted in lower sales from Japan.

Affin Hwang downgraded SLP to a “hold” call with a lower target price of RM2.62 from RM2.87 previously, adding that the key risk includes a spike in crude-oil prices and slowdown in capacity expansion.