SLP Resources (SLP)’s 1H19 core net profit at RM11.8m was flat yoy. Lower revenue was offset by improved EBITDA margins and a lower effective tax rate. Overall, the earnings were below expectations. Lower input costs and cost-efficiency measures may lift 2H19 margins but we expect earnings will likely be dragged by poor sales. As such, we reduce our earnings forecasts for 2019-21E by 5-8% and lower our TP to RM1.25 (from RM1.30). At 15x 2020E PER, valuations look fair. Maintain HOLD.

1H19 Earnings Flat Yoy, Below Expectations

SLP’s 1H19 core net profit at RM11.8m was flat yoy. Revenue was weaker (-2.5% yoy), affected by lower domestic sales (-6.9% yoy) and export sales (-15.9% yoy; ex Japan). Management expects sales volume to Japan and Australia (c.49% of 1H19 revenue) to pick up in 2H19 but we think that softer domestic demand (c.43% of 1H19 revenue) may prolong and weigh on top-line growth. The weaker top line, however, was nullified by the better EBITDA margin (+1.3ppts to 18.7% on lower resin costs and cost-cutting measures) and a lower effective tax rate of 13.3% (1H18: 14.1%; tax incentives and allowances). Overall, SLP’s 1H19 core net profit was below expectations, accounting for 45.8% and 44.8% of market and our previous full-year estimates respectively. The variance was due to lower-than-expected revenue growth.

Sequentially, 2Q19 Core Net Profit Grew 11.9% on Lower Tax Rate

Sequentially, SLP’s 2Q19 core net profit was predominantly higher due to a lower effective tax rate on reinvestment tax allowance, while operating profit was flat (+1% qoq). In addition, SLP declared a 1.5 sen interim dividend in 2Q19, bringing 1H19 DPS to 2.5 sen (1H18: 3.0 sen).

Cut 2019-21 EPS Forecasts by 5-8%; Maintain HOLD

We cut our 2019-21E EPS forecasts by 5-8% after factoring in our lower revenue forecast and lower effective tax rate. In tandem, we are lowering our 12-month price target to RM1.25 (from RM1.30; based on an unchanged 15x 2020E PER)). At 15x 2020E PER, SLP is trading within its past-10-year average mean of 15x: valuations looks fair. Key upside/downside risks to our call include: i) volatility of resin costs, (ii) foreign currency risk (from strengthening/weakening Ringgit), and (iii) weaker Japan sales.

Source: Affin Hwang Research - 5 Aug 2019