SLP Resources (SLP) reported a weaker 1Q19 results: core net profit declined marginally by 1.6% to RM5.5m due to lower revenue (-2.5% yoy). Overall, results were below market and our expectations. Maintain HOLD with a lower price target of RM1.30 (from RM1.40) after we cut our 2019-21E EPS by 9-15% and roll forward our valuation horizon. At 15.5x 2019E PER, SLP’s valuation looks fair.

1Q19 Earnings Dipped on Lower Revenue, Below Expectations

1Q19 core net profit dipped marginally by 1.6% to RM5.5m, due to weaker revenue (-3% yoy), caused by a 6.6% yoy decline in domestic sales. The decline, however, was partly cushioned by higher EBITDA margin (+1.4ppts to 18.6%) on (i) lower resin costs (ie. polyethylene -8% yoy to US$1,240) and (ii) favourable sales mix (higher proportion of export sales, which commands higher margins). Overall, the results are below market and our expectations, 1Q19 net profit accounted for 18-19% of street and our full-year earnings forecasts. Elsewhere, SLP declared its first interim dividend of 1.0 sen during 1Q19 (from 1.5 sen).

Sequentially Lower, Against a High Base

Sequentially, SLP’s 1Q19 core net profit dropped by 23.8% qoq to RM5.5m, from a high base in 4Q18 (RM7.3m) due to a lower effective tax rate on reinvestment tax allowance. Notwithstanding the weaker bottomline, SLP’s 1Q19 EBITDA held firm at RM8m.

Year of Two Halves; Capacity Expansion on Track

We anticipate 1H19 earnings to remain flat as the Group is still experiencing prolonged weak domestic sales and in anticipation of a longer festive holiday in Japan (38% of 2018 revenue). Post 2Q19, earnings should recover, in our view, as the Group gradually ramps up its current utilisation rate of 65%. With the additional capacity of 33k MT/annum (+22% yoy) coming on board, we believe SLP will continue to benefit from a lower effective tax rate of ~19% due to the tax allowance benefits.

Maintain HOLD With Lower TP of RM1.30

We cut our 2019-21E earnings by 9-15% after incorporating lower revenue forecasts. In tandem, we lower our 12-month price target to RM1.30 (from RM1.40) but maintain our HOLD rating. At 15.5x 2019E PER, close to its 5- year average of 17.7x, valuation looks fair. Key upside/downside risks to our call include: i) inclusion to the Shariah-compliant list ii) higher/lower resin costs, (iii) volatility in foreign currency risk (vs. Ringgit), (iv) weaker Japan sales, and (v) a possible ban on single-use plastic.

Source: Affin Hwang Research - 6 May 2019