1H16 core earnings of RM13.6m met our expectation (46.2%). First interim dividend of 1.5 sen was declared, on track to meet our FY16E dividend of 4.8 sen. Earnings estimates are maintained at RM29.4-35.7m for FY16-17E. The company expects to spend RM15-9m 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. Downgrade call to MARKET PERFORM (from OP) and maintain TP of RM3.11.

1H16 core net profit of RM13.6m in line with our expectation, achieving 46.2% of our FY16 estimate. No consensus available. First interim dividend of 1.5 sen was declared, and is on track to meet our FY16E dividend 4.8 sen (1.6% yield).

Results Highlights. 2Q16 core net profit was higher YoY-Ytd by 20.1% on the back of higher contribution from overseas market at 61% vs. 53% in 1H15, with higher sales primarily from Japan, while CNP margin was better (+2.1ppt) due to: (i) higher contribution from premium products (i.e. MaxInflax), (ii) installation of the new extrusion line in Oct-15, (iii) lower financing cost (-37.2%) as SLP has been actively paring down its borrowings, and (iv) lower effective tax rates (-8.3ppt) on income tax incentives. However, QoQ top line was down (-5.6%) on weaker USD in April and slower domestic demand as well as stricter credit control imposed by the Group on domestic customers, but the impact to bottom line was cushioned slightly by lower tax rates as CNP only decreased by 2.9%.

Outlook. Management is looking to spend RM15-9m on CAPEX in FY16-17E, mainly for expansion on its new plant adjacent to the current factory, to be completed by end-Sept 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. 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. We make no changes to estimates of RM29.4-35.7m in FY16-17E as we have imputed for all the above expansions.

Downgrade call to MARKET PERFORM (from OP) with an unchanged TP of RM3.11. Our TP is based on FY17E EPS of 14.5 sen and an unchanged Target PER of 21.5x. We are comfortable with our earnings estimates at this juncture as SLP continues to see margin improvements YoY and maintains its export-driven expansion play. We believe the stock has done well, increasing by 60% YTD, and 10% since our recent 3Q16 Strategy report of 8th July 2016. As most positives have been priced in, we believe SLP warrants a MARKET PERFORM call at current levels (from OP). Downside risks to our call include: (i) higher-than-expected resin cost, (ii) weaker product demand from Japan (25%-30% of sales), (iii) foreign currency risk from strengthening Ringgit, and (iv) new entrants/competition biting into its market share.

Source: Kenanga Research - 8 Aug 2016