Demonstrating Resilience

SLP Resources (SLP) reported a decent set of results – 1QFY18 core net profit grew 12.8% yoy to RM5.2m on tax benefits arising from reinvestment tax allowance but was within our and market expectations. Notwithstanding the solid results, we remain cautious of SLP’s near-term prospects in view of the rising material costs and the strengthening Ringgit factor. Maintain HOLD and a lower target price of RM1.07.

Results Are Broadly Within Market and Our Expectations

SLP saw its 1Q18 core net profit grow by 12.8% yoy to RM5.2m, benefiting from a lower tax rate due to reinvestment tax allowance. At the topline, 1Q18 revenue was down by 3.9% yoy, caused by weaker export sales denominated in US$. Sequentially, the group’s 1Q18 core net profit was higher by 12.6% qoq on similar reasons mentioned above. Overall, the results are within expectations. 1Q18 net profit accounts for 23% and 27% of street’s and our full year profit forecast respectively.

Margins Under Pressure, But Demand Remains

We expect margins to remain under pressure in FY2018E, in view of rising resin prices and unfavourable shift in product mix. Nonetheless, management remains positive on revenue growth for FY2018-2019E driven by higher production capacity. The group’s new RM30m plant will see production capacity of 27k metric tonne (MT) and subsequently be raised to 38k MT by 2019E. The expansion will enable SLP to penetrate the China healthcare sector, which commands better margins than other products.

Maintain HOLD and TP of RM1.07

We make no changes to our earnings estimates but cut our target price to RM1.07 (RM1.38 previously). This is based on rollover valuation base year of FY2019E EPS and a lower PE multiple of 15x (from 20x), pegged to valuations similar to peer, SCGM Bhd. Downside risks: higher-thanexpected resin costs and a slowdown in capacity expansion; upside risk: stronger product demand from overseas.

Source: Affin Hwang Research - 7 May 2018