SLP’s 9M22 core earnings of RM13.2m (+31.7% QoQ, -4.1% YoY) met our but missed consensus forecast. Overall, we are anticipating SLP to post a decent 4Q22 earnings, premised by the ease in foreign worker shortage, seasonally strong plastic demand, and the weak ringgit. That being said, we cut our FY23 and FY24 earnings by 7.4% and 4.4% in view of slower sales recovery momentum under the current volatile economic outlook. Post earnings adjustment, we downgrade SLP’s rating to SELL with a TP of RM0.89 – with share price appreciating 19% since our initiation, we feel it is time to take profit.

Within expectation. SLP’s 3Q22 core PAT of RM4.95m (+31.7% QoQ, -4.1% YoY) brought 9M22’s sum to RM13.2m (-4.1% YoY). The result met our but missed consensus’ expectations, accounting for 70.7% and 63.4%, respectively. 9M22 Core PAT was arrived after deducting a one-off disposal gain of RM5.1m that was incurred in 2QFY22.

Dividend. Declared DPS of 1.5 sen (3Q21: 1.5 sen), which goes ex on 7 December 2022. 9M22 DPS amounted to 4sen vs 9M21’s 4sen.

QoQ. Top line was flattish at 0.4%. This is likely due to lower contribution from the trading segment following the plunge in polymer price that offset the higher ASPs from the manufacturing segment. Export sales grew 13.8% on the back of weak ring git, whilst domestic sales contracted 8.4% as the result of demand slowdown following several price hikes, in our view. All in, Core PATAMI registered 30.6% growth due to higher finance income.

YoY. Top line registered 30.6% growth, with domestic and export sales growing by 20.1% and 46.3%, driven by stronger sales volume as economic recovery gains traction. Coupled with 1.5pts GP margin expansion following the price hike, core PAT grew at a higher margin at 60.6%.

YTD. Lifted by higher sales volume and ASPs, revenue was up 13.0%, with the GP margin rising 0.97 pts. However, core PAT contracted -4.1% as the result of higher operating costs and ongoing labour shortage.

Outlook. Polymer prices are anticipated to stay under pressure in 4Q22, given (i) weak demand from China (the world's largest polymer user), (ii) protracted US-China trade war and (iii) new petrochemical capacity kicks in – including the Petronas Pengerang Integrated Complex. In anticipation of further depreciation in ringgit against USD towards the end of the year, margin expansion might extend toward 4Q22, although ASPs will be revised down in 4Q to reflect the easing polymer prices. Together with the replenishment of foreign workers (by end-Oct) amidst the seasonally strong plastic sales due to the festive season, we should see further recovery in the group's utilization rate in the upcoming results.

Forecast. In anticipation of slower sales recovery momentum in the current volatile economic outlook, we cut our FY23 and FY24 utilization rate assumptions to 60% (vs 63%) and 63% (vs 60%). Consequently, FY23 and FY24 earnings are lowered by 7.4% and 4.4%.

Downgrade to SELL with a TP of RM0.89. Post earnings adjustment, our TP is lowered to RM0.89 from RM0.97. Following its 19.1% share price appreciation since our initiation report, we feel it is time to take profit on the stock – we downgrade our rating on SLP to SELL based on 14.5x FY23f EPS of 6.2sen, which is in line with its 5- year historical P/E average.

Source: Hong Leong Investment Bank Research - 7 Nov 2022