SLP Resources (SLP) reported a good set of results - 9M18 core net profit grew 18% yoy to RM17.6m, driven by sales volume growth of 4% yoy and a higher-margin product mix. However, results were below expectations, delivering only 70% of our full-year forecast due to a higher-than-expected effective tax rate. Post our earnings revisions, we maintain our BUY rating with a lower price target of RM1.40 (from RM1.50). At 9.5x 2019E PER, valuation looks appealing against the historical mean PER of 14.6x.

9M18 Core Earnings Up 18% Yoy; Below Expectations on Higher Tax

SLP’s 9M18 core net profit increased by 18% yoy to RM17.6m, in tandem with higher revenue growth (+4% yoy) and a higher EBITDA contribution (+1.7ppts to 17%; higher-margin product mix). Pretax profits came in within our expectations at 74% of our full-year forecast, but the bottom line was below at 70% of our full-year profit forecast due to a higher-than-expected effective tax rate of 17%. The higher effective tax rate was a negative surprise to us, as we had previously assumed SLP would enjoy lower tax rates from the reinvestment allowance; the effective tax rate was 11% in 2Q18. In addition, SLP declared a second interim dividend of 1.5 sen during 2Q18.

Sequentially Weaker by 4% Qoq

Despite a 17.6% growth in revenue, SLP’s 3Q18 core earnings declined by 4% qoq to RM6m, affected by a lower EBITDA contribution (-0.9ppts to 16.7%). We believe the decline in margin was attributable to the higher contribution from the trading division, which commands a lower profit margin compared to the manufacturing division’s margin.

Maintain BUY; Trimming TP to RM1.40

We cut our 2018-20 EPS estimates by 6% to account for the higher effective tax rate, and lower our 12-month TP to RM1.40 (based on an unchanged 2019E PER of 15x). We maintain our BUY rating as we continue to like SLP for its attractive earnings growth with a 21% CAGR over 2017-20E, strong execution track record and robust balance sheet. Downside risks: higher-than-expected raw-material prices, a slowdown in capacity expansion, weak export demand and losing its Shariah-compliant status due to higher cash holdings in the conventional bank account.

Source: Affin Hwang Research - 5 Nov 2018