SLP Resources (SLP) reported a flat set of results: 9M19 core net profit dipped by 2% yoy to RM17.3m due to lower revenue (-8% yoy) and lower interest income. Overall, the results were within our forecasts but a tad below market expectations. In the long run, we think the softer demand could still drag on SLP’s revenue growth but margins should largely benefit from the lower input costs and better efficiency measures. We maintain our earnings forecasts, HOLD rating and TP of RM1.25. At 15x 2020E PER, valuations look fair.

9M19 Core Net Profit Slipped by 2% Yoy; Within Our Expectations

SLP’s 9M19 core net profit slipped by 2% yoy to RM17.3m due to lacklustre revenue (-8% yoy, softer demand in most key markets except Japan) and lower interest income, partly cushioned by a better EBITDA margin (+1.6ppts to 18.8%, on lower resin costs and better manufacturing efficiency) and a lower effective tax rate of 15% (9M18: 17%, on tax incentives and allowances). Overall, the results were below the market’s but within our expectations; 9M19 core net profit accounted for 69% of the street’s and 71% of our full-year profit forecasts.

Weaker Sequentially Due to Higher Effective Tax Rate

Operationally, SLP’s 3Q19 performance was flat (-1% qoq) on similar reasons mentioned above. However, SLP’s 3Q19 core net profit was weaker by 10% qoq due to a higher effective tax rate of 17% (vs. 9% in 2Q19). In addition, SLP has declared a 1.5sen interim dividend in 3Q19, bringing 9M19 DPS to 4.0sen (vs. 9M18: 4.5sen).

Maintain HOLD and Unchanged TP of RM1.25

We maintain our earnings forecasts, HOLD rating and 12-month price target of RM1.25. We believe earnings will likely pick up in 4Q19, on a higher contribution from Australia (fashion bags during year-end festive season) and Japan (Mizukiri bags). At 15x 2020E PER, SLP is trading within its past-10-year average mean of 15x: valuation 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) stronger/weaker Japan sales

Source: Affin Hwang Research - 11 Nov 2019