Period

3Q15/9M15

Actual vs. Expectations

Within expectation. 9M15 core net profit (CNP) of RM17.8m came in within our expectation at 73% of full-year forecast. Note that there are no consensus estimates.

Our CNP excludes 9M15 unrealised forex gains of RM2.5m.

Dividends

A special dividend of 1.5 sen was declared, bringing 9M15 DPS to 3.0 sen. This makes up 77% of our expected FY15 dividend.

As we have not imputed the special dividend payment in our original forecast, we raise our FY15E DPS to 4.5 sen, implying a payout ratio of 46% (in line with 3-year average of 47%). This translates to an expected dividend yield of 2.4%.

Key Results Highlights

QoQ, CNP was flat at RM6.5m on unchanged topline of RM42.7m as higher sales volume of high-end exports (+29%) were offset by softer domestic volume of packaging products (- 27%). CNP margin was maintained at 15% as resin prices stabilised at the USD1,200/metric ton (MT) range.

YoY, CNP jumped 126% to RM17.8m as net margins more than doubled to 14%, boosted by lower resin costs and higher contribution from premium products (eg. MaxInflax). However, revenue declined 6% due to weaker domestic trading revenue (-28%) as well as lower ASPs due to declining resin prices.

Outlook

We expect new MaxInflax bag manufacturing capacity of 1.8k MT/yr (doubling existing capacity) to kick in during 4Q15. Inclusive of the expansion, we expect FY16E earnings to rise 23% to RM29.8m.

FY15-16E CAPEX is expected to be RM9.0-6.0m for expansion and maintenance, which will be funded by internally generated funds.

Long-term outlook is positive on continuing expansion plans, as SLP intends to construct a new plant adjacent to its existing factory with a projected capacity of 14k MT (+58%). This could increase revenue by RM60-100m in FY18, although we have yet to impute the contribution as the project is still in planning stages.

Change to Forecasts

No change to our FY15-16E CNP of RM24.3-29.8m, with estimated dividend yield of 2.4-2.6%.

Rating

Downgrade to MARKET PERFORM (from OUTPERFORM)

Despite our positive earnings outlook on SLP, we are calling it a day on the stock in light of the stellar share price appreciation of 215% YTD. We believe at this stage the market has priced in its solid growth prospects and strong margin improvement. Thus, we revise our rating to MARKET PERFORM from OUTPERFORM. We will look to review our recommendation with an upside bias if there are further earnings catalysts or any significant share price corrections as we still like management’s ability to generate value and their positioning as a net USD export beneficiary player.

Valuation

No change to our TP of RM1.87 based on 15.5x Target PER on FY16E Core EPS of 12.0 sen. Our Target PER of 15.5x (+1.7SD against 5-year historical valuation) derived a PEG of 0.69x which implies an 8% discount to Tech sector’s PEG of 0.75x. We believe that growth-based valuation is appropriate for this rapidly expanding sector, and we compare the sector to Tech due to its similar USD/export beneficiary position. Our discount of 8% signifies a premium to industrial packagers (10% discount) and reflects SLP’s strong CNP growth prospect and robust margins.

Risks

Weaker product demand from Japan (25%-30% of sales)

Foreign currency risk from strengthening Ringgit

New entrants/competition could bite into market share.

Source: Kenanga Research - 9 Nov 2015