1Q17 core earnings of RM4.5m came broadly within our expectation (13%) as we expect stronger quarters ahead. Maintain FY17E but lower FY18E earnings marginally. We expect SLP to spend RM13m each in FY17-18E on CAPEX for new machinery at its new plant, and an additional warehouse, increasing capacity up to 14k MT (+58%) in FY19. Maintain OUTPERFORM and increase TP to RM3.72 (ex-all TP RM3.10) post rolling forward to FY18E.

1Q17 core net profit of RM4.5m is broadly within our expectation, achieving 13% of our FY17 estimate. No consensus is available. We deem the results as broadly within as we expect significantly stronger quarters ahead, especially in 2H17 from the rollout sales of its healthcare products, which command far better margins than its kitchen bags and MaxInflax products. To recap, we expect the healthcare segment to contribute 8-10% of revenue in FY17-18 vs. c.3% in FY16. Secondly, we expect lower effective tax rate in coming quarters of 19% in FY17 (vs. 25% in 1Q17) upon capex utilisation for the Group’s expansion plans. Thirdly, raw materials prices have been fluctuating in increased slightly in 1Q, while historical trends suggest that 1H tends to be weaker in terms of operating profit, likely due to sales of lower margin products. No dividends, as expected.

Results Highlights. Ytd-YoY, top-line and operating profit was up by 2.9% and 9.5%, respectively, on slightly higher ASP for export sales. However, CNP declined by 33% on the back of higher effective tax rates of 25% (vs. 18.5% in 1Q16) and after stripping off RM0.5m unrealised gains (vs. RM1.8m net unrealised loss in 1Q16). QoQ, top-line was up by 12.4% from higher sales and sales volumes domestically, and to Japan. However, operating profit and PBT margin declined (-6.7ppt) likely on sales of lower margin products this quarter and fluctuations in raw material prices, while core net margin declined to 10% (vs. 22%) in light of higher effective tax rates this quarter of 25% (vs. 8% in 4Q16).

Proposed placement and bonus issue. SLP proposed; (i) a private placement of up to 16.8m new shares (6.8%) of total issued shares, and (ii) bonus issue of up to 52.8m with 1 bonus share for every 5 existing SLP shares. We were fairly surprised by the placement and bonus issue as its balance sheet is healthy, constantly in a net cash position. However, we are positive on this as management prefers to remain prudent to avoid incurring any financing cost from additional borrowings required to fund the expansion, while the bonus issue will lend trading liquidity to the stock. (refer overleaf)

Outlook. All in, we expect capex allocation of RM13-13m in FY17-18 with the Group remaining net cash. FY17-18E capex will be for capacity expansion in FY18 as well as the new storage warehouse, and will be funded by the placement. SLP plans to increase capacity up to 38k MT (+58%) by FY19. We make no changes to our FY17E NP of RM36.6m, but lower FY18E NP slightly to RM45.7m, post accounting for expansion plans up to FY19 (refer overleaf).

Maintain OUTPERFORM with an increased TP to RM3.72 (ex-all TP of RM3.10) from RM3.18. Our TP is increased post rolling forward to FY18E EPS of 17.3 sen (Fully Diluted: 14.4 sen), on an unchanged Target PER of 21.5x. We are comfortable with our valuations as we expect SLP to see strong earnings growth and margin improvements YoY through its export-driven expansion play. At current levels, SLP is commanding attractive 39% total returns.

Source: Kenanga Research - 8 May 2017