1Q16 core earnings of RM6.9m met our expectations (23.4%). No dividends declared as expected. Earnings are maintained at RM29.4-35.7m for FY16-17E. The company expects to spend RM15-9m (from RM6-6m) in FY16-17E on CAPEX for downstream machinery in its new plant, which will be completed by 3Q16, while FY17 CAPEX will be for new machinery for capacity expansion in FY18. Maintain TP of RM2.24 but upgrade our call to OUTPERFROM (from MP). 1Q16 core net profit of RM6.9m inline with our expectations, achieving 23.4% of our FY16E estimate, from increased capacity expansion in 2HCY15, and bolstered by strong sales volumes to export markets.

Results Highlights. 1Q16 CNP came in higher at an impressive 43.2% YoY growth aided by stronger topline growth (+7.8%) from higher sales volume to export markets, primarily Japan, and improved CNP margins (+3.8ppt) on: (i) higher contribution from premium products (i.e. MaxInflax), (ii) installation of the new extrusion line in Oct-15, (iii) lower finance cost (-73%) as SLP has been actively paring down its borrowings, and (iv) lower effective tax rates by 7.8ppt on income tax incentives. However, QoQ topline was down marginally (-2.5%) as 1Q16 was a shorter working period due to the month of Feb, while CNP margins eroded (-2.5ppt) after stripping out unrealised gains on derivatives of RM1.2m in the current quarter, and on higher tax rates.

Outlook. We expect the MaxInflax bag manufacturing capacity of 1.8k MT/year (doubling previous capacity) which kicked in 4Q15 to fully contribute to FY16E earnings. Management is looking to spend RM15-9m on CAPEX in FY16-17E, which is slightly higher than our initial estimates of RM6-6m, mainly for expansion on its new plant adjacent to the current factory, to be completed by end Aug 2016. We do not expect any capacity expansions in FY16 with planned capex mainly for acquisition of downstream machinery (i.e. printing) and building cost, while FY17 capex will be for capacity expansion in FY18 onwards, and will be funded by internally generated funds. SLP’s longer term expansion plans are intact as it intends to increase capacity by 14k MT (+58%) in FY18 onwards, which could potentially increase revenue by RM60-100m. No changes to forecast. Earnings forecast is maintained at RM29.4- 35.7m in FY16-17E.

Upgrade to OUTPERFORM (from MP) with unchanged TP of RM2.24. Our TP is based on FY17E EPS of 14.5 sen, and an unchanged Target PER of 15.5x. However, due to profit-taking activity in recent weeks, we upgrade our call to OUTPERFROM (from MP) as SLP commands strong total returns of 14.9%, while we are comfortable with our earnings estimates at this juncture as SLP continues to see margin improvements YoY and maintains its exportdriven expansion play. Risks to our call include; (i) weaker product demand from Japan (25%-30% of sales), (ii) foreign currency risk from strengthening Ringgit, and (iii) new entrants/competition biting into its market share.

Source: Kenanga Research - 6 May 2016