9M16 core earnings of RM20.3m was broadly within our expectation (69.1%) as we expect a stronger 4Q, while second interim dividend of 1.5 sen is on track. Maintain FY16-17E earnings. The company expects to spend RM15- 9m in FY16-17 on capex for downstream machinery in its new plant, which will be completed in 4Q16, while FY17 capex will be for new machinery for capacity expansion in FY18. Maintain OUTPERFORM and TP of RM3.11.

9M16 core net profit of RM20.3m is broadly within our expectation, achieving 69.1% of our FY16E estimate. No consensus is available. We deem the results as broadly within as we expect a stronger 4Q16 on increased sales in 4Q and more higher margin products upon completion of the new factory in early 4Q16, which is catered for downstream expansion. Second interim dividend of 1.5 sen was declared, bringing 9M16 dividend to 3.0 sen (63%). This is still on track to meet our FY16E of 4.8 sen (2.0% yield) as we expect another pay-out in 4Q16 based on our 40% dividend pay-out ratio estimate which is in line with the Group’s dividend policy.

Results Highlights. 9M16 core net profit was higher Ytd-YoY by 14.3% on the back of higher contribution from export sales at 62% vs. 56% in 9M15, mainly from the Japanese markets, and on the back of CNP margin improvements (+1.9ppt) from : (i) higher contribution from premium products (i.e. MaxInflax), (ii) installation of the new extrusion line in Oct 2015, (iii) lower finance cost (-83%) as SLP has been actively paring down borrowings, and (iv) lower effective tax rates (-7.8ppt) on income tax incentives from investments at the new factory. QoQ top line was down slightly (2.8%) on slower domestic demand as well as stricter credit control imposed by the Group on domestic customers, but bottom line saw slight improvements (+0.5%) from the sale of higher margin products and lower tax rates (-6.5ppt).

Outlook. Management is looking to spend RM15-9m on capex in FY16-17, and has spent RM12m to date, mainly for expansion on its new plant adjacent to the current factory which was completed in early Oct 2016 with the installation and commissioning of the new printing press, and is awaiting more downstream machinery by mid Nov 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%) from 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 our estimates of RM29.4-35.7m in FY16-17E as we have imputed for all the above expansions.

Maintain OUTPERFORM with an unchanged TP of RM3.11. Our TP is based on FY17E EPS of 14.5 sen, and an unchanged Target PER of 21.6x. We are comfortable with valuations as SLP continues to see margin improvements YoY and maintains its export-driven expansion play. At current levels, SLP is commanding an attractive 32.4% total returns.

Source: Kenanga Research - 7 Nov 2016