FY16 core earnings of RM29.3m are within our expectations (100%) while FY16 dividend of 4.5 sen is also within (95%). Maintain FY17E earnings and introduce FY18E numbers. We expect SLP to spend RM9m each in FY17E on CAPEX for new machinery at its new plant, and in FY18 to increase capacity by 14k MT (+58%). Maintain OUTPERFORM and TP of RM3.18.

FY16 core net profit of RM29.3m is within our expectation, achieving 100% of our FY16E estimate. No consensus available. Third interim dividend of 1.5 sen was declared, bringing FY16 dividend to 4.50 sen (95%) which is within our FY16E of 4.75 sen (1.9% yield).

Results Highlights. Ytd-YoY, FY16 core net profit was higher by 12.7% on the back of higher contribution from export sales at 62% vs. 59% in FY15, mostly to Japan and on the back of CNP margin improvements (+2.3ppt) from: (i) higher product margins from contribution of premium products (i.e. MaxInflax), (ii) installation of the new extrusion line in Oct 2015 and downstream machinery in FY16, (iii) lower finance cost (-88%) as SLP has been paring down its borrowings, and (iv) lower effective tax rates (-8.7ppt) on income tax incentives from investments at the new factory. QoQ top-line was flattish, with stricter credit control imposed by the Group on domestic customers and postponement of orders to 1Q17, but bottom-line grew by 33% making 4Q16 its strongest quarter yet on strong margin improvements (+5.5%) mainly from the sale of higher margin products and lower tax rates (-2.3ppt). Note that one of SLP’s subsidiary’s adopted the USD as its functional currency (from Ringgit) in compliance with MFRS 121 in 4Q16; however, the impact to full- year earnings is negligible at <RM1m.

Outlook. We are expecting capex allocation of RM9m each in FY17- 18E. FY17 capex will be for capacity expansion in FY18 onwards, and will be funded by internally generated funds. SLP’s expansion plans are intact as it intends to increase capacity by 14k MT (+58%) in FY18 to 38k MT which we have accounted for in our estimates. We make no changes to estimates of RM36.6 in FY17E and introduce FY18E of RM48.5m post accounting for expansion plans.

Maintain OUTPERFORM with an unchanged TP of RM3.18. Our TP is based on FY17E EPS of 14.8 sen, and an unchanged Target PER of 21.5x. We are comfortable with valuations as SLP continues to see strong earnings growth and margin improvements YoY through its export-driven expansion play. At current levels, SLP is commanding attractive 37% total returns.

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 - 24 Feb 2017