SLP reported weak 2017 core net profit of RM18m (-34% yoy) due to margin squeeze. Moving into 2018, we expect its margin to remain under pressure, in view of rising resin prices and unfavourable shift in product mix. However, the margin pressure will be partly cushioned by sales volume growth, driven by spillover demand arising from Chinese supply disruptions. We cut our 2018-19E EPS by 41-71%. Maintain HOLD with lower TP of RM1.38.

Weak 2017 Results – Below Expectations

SLP booked in 2017 core net profit of RM18.1m (-34% yoy), just 92% of consensus and 86% our full year forecasts. Key deviation to our forecast was a higher effective tax rate of 23% (vs forecast of 13%). Also, SLP’s 2017 EBITDA margin was pressured by (i) higher resin prices and (ii) unfavourable changes in sales mix. Moving into 2018, we expect its margin to remain under pressure, but the impact to be partly cushioned by higher sales volume, driven by spillover demand arising from the tightened environmental control in China, which is disrupting the Chinese supply.

4Q17 Earnings Was Sequentially Flat

Sequentially, the group’s 4Q17 EBITDA grew by 21% to RM7.6m on higher EBITDA margin of 16.9% (up by 3.1ppts qoq), attributable to higher plant utilisation / lower business disruptions. To recap, SLP incurred higher overtime payments for labour in 3Q17, as a result of a higher number of public holidays in September. Nonetheless, the group’s 4Q17 core net profit fell by 2% qoq to RM4.6m due to higher effective tax rate.

Maintain HOLD, TP Trimmed to RM1.38

We lowered our 2018-19E earnings forecasts by 41-71%. We expect higher cost pressure (rising resin cost, higher utilities and staff cost) and lower margin product mix to drag EBITDA margin to 12-13%, similar to its 2010-14A EBITDA margins of 10-12%, but sharply lower than 16-22% in 2015-17 (when resin costs was lower and Ringgit was weak). We cut our target price to RM1.38 based on an unchanged 20x 2018E PER, comparable to peers average. Maintain HOLD. Key risks include higher/lower-than-expected resin costs, stronger/weaker product demand from overseas and slowdown in capacity expansion.

Source: Affin Hwang Research - 26 Feb 2018