Despite a 6% growth in revenue, SLP’s 9M17 core earnings declined 22% yoy and fell below expectations. Margins remained under pressure due to higher resin prices and an unfavourable shift in product mix. SLP declared a second interim dividend of 1.5 sen, bringing ytd DPS to 2.7 sen. Maintain HOLD but with a reduced TP of RM2.01, based on a lowered PE of 20x on unchanged 2018E EPS.

9M17 Core Earnings Disappoints

9M17 core net profit of RM13.5m (-22% yoy) came in below our expectations, achieving 63% and 54% of our and street 2017E estimates respectively. The earnings disappointment was due to a combination of: 1) lower than expected EBITDA margin – 9M17 EBITDA margin of 15.2% vs our forecast of 15.5% and 2) a higher than expected 9M17 effective tax rate of 17.4% vs our forecast of 13%. Overall, while 9M17 revenue was up 5.7% yoy, on the back of stronger domestic sales, margins remain pressured by: (i) higher resin prices and (ii) unfavourable changes in their sales mix with increased sales of lower margin products (9M17 EBITDA margin contracted 5ppts yoy).

3Q17 Net Profit Improved Qoq But Margins Still Under Pressure

Although the Group’s revenue and net profit increased by 6.1% qoq and 2.2% qoq respectively, EBITDA margin remained under pressure, slipping a further 0.8ppts qoq. The increase in revenue was due to revenue growth in the domestic market (+5% qoq) and a rebound in revenue from Japan (+7.8% qoq). However, this was mitigated by a one-off corporate exercise expense of RM0.8m and slightly higher operating expenses due to overtime payments for labour, as a result of the high number of public holidays in September.

Maintain HOLD But With a Lower Target Price of RM2.01

We make no changes to our earnings estimates but cut our target price to RM2.01 from RM2.62 previously. This is based on a lowered PE multiple of 20x (previously 26x) which is based on +1SD above its historical mean PE and on unchanged 2018E EPS. Maintain HOLD. Key downside risk include a spike in crude-oil prices resulting in higher resin costs and slowdown in capacity expansion. Upside risk will be from higher than expected sales and successful penetration into new markets.

Source: Affin Hwang Research - 7 Nov 2017