SLP Resources (SLP) reported a decent set of results – 2018 core net profit rose by 26.9% yoy to RM24.9m, mainly due to a lower-thanexpected effective tax rate. Operationally, 2018 revenue (+4.4% yoy) and EBITDA (+12.3% yoy) were within our expectations. We believe, however, that the positives have been largely reflected in SLP’s share price (+47% since the 3Q18 results announcement). Hence, we downgrade it to HOLD (from BUY) with an unchanged TP of RM1.40.

Operationally Within Expectations

SLP’s 2018 core net profit rose by 26.9% yoy to RM24.9m, attributable to modest revenue growth (+4.4% yoy), a higher EBITDA margin (+1.2ppt to 17.0% on greater economies of scale) and a 10.3ppt reduction in the effective tax rate to 10.9% (recognition of deferred tax asset on unutilised tax allowances). Reported net profit beat the consensus and our expectations - 103% and 111% of the respective full-year forecasts on a lower tax while operationally, the pretax profit was largely in line. Similar to 2017, SLP declared a 1.5 sen dividend for 4Q18 (2018: 4.5 sen).

Lower 4Q18 Revenue (-9%), Core Profit Saved by Lower Tax Rate

SLP’s 4Q18 revenue dropped by 9% qoq due to lower local sales (-14.3% qoq), as its customers stocked up in 3Q18, ahead of the implementation of the sales and service tax. Despite lower resin prices, the 4Q18 EBITDA margin was flat at 16.7% as SLP adjusted its ASP to remain competitive. Nonetheless, 4Q18 net profit grew 23.6% to RM7.3m on the lower tax rate.

Ongoing Capacity Expansion

SLP is on track to increase its capacity up to 33k MT/annum (+22% yoy) by 2Q19. We expect the average utilisation rate to remain firm at 75-77% over 2019-21E. Besides fulfilling the existing order backlog, the ramp-up is also to cater for the expansion of its diaper backsheet production. In addition to the earlier target market (China), SLP is exploring the Southeast Asia diaper markets, acknowledging that the China market has been slow and difficult to penetrate.

Source: Affin Hwang Research - 25 Feb 2019