Period

2Q15/1H15

Actual vs. Expectations

Well within. 1H15 net profit (NP) of RM10.9m came in within our expectation at 51%. Note that there are no consensus estimates.

Dividends

First interim dividend of 1.5 sen was declared. This is still on track to meet our FY15E of 3.5 sen (2.4% yield).

Key Results Highlights

QoQ, topline was up by 2.6% to RM42.5m due to higher domestic revenue (22%) recorded by the trading segment on higher resin prices. However, the main driver was the higher operating profit margin due to better sales mix; (i) moving away from more commoditised goods, (ii) increasing sales of more premium products (e.g. Maxinflax), and (iii) less contribution from the thinner margin's trading revenue (28% share in 1H15 from 37% in FY14), while efficiency increased on better cost management. Additionally, lower finance cost (- 36.4%) boosted net profit up by 43.9% to RM6.4m.

YoY, topline was down by 6.6% to RM83.9m mainly due to weaker domestic revenue (-26%), in the trading segment as resin price was low due to weaker crude oil prices. However, PBT margin was boosted by 10.3ppt to 17.5% on: (i) lower cost of raw materials due to lower resin prices, and (ii) the Group’s initiative to change in sales mix due to reasons mentioned above. That, coupled with lower financing cost (- 58%), as SLP completely pared down short-term borrowings, which helped to increase net profit by 115.5% to RM10.9m.

Outlook

SLP is currently ramping up its MaxInflex-Bags capacity, adding on an additional 1.8k MT p.a. on top of the current 1.8k MT p.a. while contributions should accrete immediately after production in 3Q15.

FY15-16E CAPEX is expected to be RM9.0m-RM6.0m for expansion and maintenance, which will be funded by internally generated funds.

FY15E may continue to see better quarters ahead in light of the favourable USD exchange rate (1USD = RM3.90 currently) vs. our assumptions of RM3.65-RM3.60 for FY15-16E. We may review our earnings estimates if margins are better than expected in coming quarters or if the USD-MYR dynamics moves beyond our assumptions.

Change to Forecasts

We make no changes to our FY15-16E NPs of RM21.4m- RM28.0m, with estimated gross dividend yields of 2.4%-3.1%, respectively.

Rating

Maintain OUTPERFORM

Valuation

Maintain OUTPERFORM and maintain TP of RM1.76 based on a targeted Fwd PER of 15.5x (similar to the Tech Sector) on FY16E EPS of 11.3 sen.

At this juncture, SLP is commanding a decent 21% upside to our TP. We believe SLP will continue to benefit from the stronger USD and low oil prices, while profitability may continue to improve with more downstream services. Its FY15- 16E earnings growth of 75.8%-31.1% is far superior to its peers of -4.7%-12.9%, and closer to small mid-cap Tech sector’s average of 62.1%-22.7%.

Risks to Our Call

(i) weaker product demand from Japan (25%-30% of sales), (ii )foreign currency risk from strengthening Ringgit, and (iii) new entrants/competition biting into market share.

Source: Kenanga Research - 10 Aug 2015