SLP Resources (SLP) reported a good set of results – 1H18 core net profit grew 17% yoy to RM11.7m on higher EBITDA, interest income and lower tax rates. The 1H18 results came in above our expectations due to higher-than-expected margins on better sales mix and the Group’s ability to pass down higher resin costs. At 13x FY19E PER, valuation looks attractive relative to peer. Upgrade to BUY with a higher target price of RM1.33.

1H18 Core Net Profit Grew 17% to RM11.7m, Above Expectations

SLP’s 1H18 core net profit grew by 17% yoy, thanks to higher EBITDA (+5.5% yoy), higher interest income and lower effective tax rates of 14% (vs 1H17 of 19%). Top-line came in within our expectations at 44% while bottom-line beat our forecast (at 62% of our full year profit forecast) due to higher-than-expected margins arising from: 1) better sales mix (i.e. thin gauge films for Thailand market) and 2) Group’s ability to pass down costs, in our view. SLP declared its first interim dividend of 1.5 sen during 2Q18.

Sequentially 2Q18 Earnings Were Stronger

SLP’s 2Q18 core net profit of RM6.1m was 8.5% stronger qoq. The sequential increase in earnings was mainly attributable to the lower effective tax rate of 11% (vs 1Q18 of 18%) on reinvestment tax allowance. SLP’s 2Q18 headline net profit was 27% higher qoq due to improved underlying earnings (+8.5%) and forex gain of RM0.5m (vs RM0.5m forex loss in 1Q18).

Higher TP at RM1.33, Upgrade to BUY

We have raised our EPS forecasts for CY18-20E by 12-28% in anticipation of better performance moving forward. We expect margins to normalise to 16-17% in 2H18, driven by sales of higher margin products and softer resin cost. In tandem, we raise our TP to RM1.33, based on an unchanged 15x FY19E EPS, comparable to peer, SCGM Bhd. Downside risks: higher-than expected resin costs, strengthening Ringgit and a slowdown in capacity expansion.

Source: Affin Hwang Research - 6 Aug 2018