We met up with SLP’s management last week and came away feeling reassured on the company’s future prospects. As expected, penetration into the China and SEA markets via healthcare products will see some fruition in FY17 while capex plans are on schedule to fully accrete by FY18. All in, we maintain FY17-18E of RM36.6- 48.5m. Maintain OUTPERFORM with an unchanged TP of RM3.18.

We expect penetration to new markets to pay off in FY17-18. Management has been actively marketing its healthcare products to China and South-East Asia (SEA) over the past year. Based on our estimates, we expect the healthcare segments contribution to improve to c.8-10% of revenue in FY17-18 from c. 3% in FY16 as marketing initiatives start to bear fruit, which we have accounted for in our estimates previously.

Capex plans well on schedule. We are targeting a capex allocation of RM9m each in FY17-18, which will consist of machinery for its new plant, located adjacent to the existing plant in Kulim. The capex will be allocated for capacity expansion in FY18, and will likely 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.

Expanding margins YoY from better product mix and stable resin cost. We are expecting core net margins to improve going forward, to 19.5-19.8% in FY17-18 (vs. 15.1% in FY16) from: (i) full- year effect upon commissioning of downstream machinery in FY16 (i.e. printing machines) allowing for better margins on value-added services, (ii) increased contributions from healthcare segment due to its higher product margins and as we expect higher contribution from this segment, and (iii) improved sales from other high margin products (i.e. MaxInflax). This is on the back of stable resin cost at USD1,100-1,200/tonne currently.

We maintain our FY17-18E earnings estimates of RM36.6-48.5m in FY17-18E. Based on the Group’s 40% dividend policy, we expect NDPS of 5.9-7.8 sen in FY17-18, implying dividend yields of 2.3- 3.0%.

Maintain OUTPERFORM and 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 the valuations which are premised on the Group’s strong earnings growth (25-33% in FY17-18E) and margin improvements YoY through its export-driven expansion play. SLP is commanding attractive 24% 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 - 16 Mar 2017