1H17 core earnings of RM8.8m came in below our expectation (24%) on weak margins in 2Q17, but we expect stronger quarters ahead. As such, we trim FY17-18E earnings by 21-15% to RM29-38m. We expect SLP to spend RM13m each in FY17-18E on CAPEX for new machinery for its new plant and an additional warehouse, increasing capacity up to 14k MT (+58%) in FY19. Maintain OUTPERFORM on lower TP of RM3.00 (from RM3.72).

1H17 core net profit of RM8.8m was below our expectations, achieving only 24% of our FY17 estimate. No consensus is available. Top-line came in within our expectations at 48%, but bottom-line came in below due to margin compressions from: (i) higher raw material prices in 2Q, and, (ii) lower export sales conversion rates, which affected margins. Additionally, we expected significantly stronger quarters in 2H17 from the roll-out of its healthcare products, which command far better margins than 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. 1H17 dividend of 1.5 sen was declared, also below at 27% of our FY17E dividend of 5.5 sen.

Results Highlights. Ytd-YoY, top-line was up by 2.7% on slightly higher domestic demand for flexible packaging products. However, CNP declined by 35% on: (i) lower operating and PBT margins (-2.1ppt) on higher raw material cost, (ii) higher effective tax rates of 19% (vs. 17% in 1H16), and (iii) stripping off RM0.4m unrealised gains. QoQ, top-line was down by 6.0% on lower sales volume from export markets, primarily the Japanese market, while margins compressed due to similar reasons mentioned above (i.e. higher raw material cost) and unfavourable conversion selling prices in USD in 2Q17. All in, this dragged down CNP by 7.4%.

Outlook. All in, we expect capex allocation of RM13-13m in FY17-18 with the Group remaining in a net cash position. FY17-18E capex will be for capacity expansion in FY18 as well as the new storage warehouse, and will be funded by share placement. SLP plans to increase capacity up to 38k MT (+58%) by FY19. We expect net margins to improve in 2H from lower resin prices going forward, while we assume YTD average resin cost of USD1,200/MT.

We lower our FY17-18E by 21-15% to RM29-39m post compressing our margins for higher resin cost to USD1,200/MT (from USD1,100/MT) due to higher resin cost in 1H17. As such, we lower CNP margins to 15- 17% in FY17-18E, closer to current levels, (from 20-20%).

Maintain OUTPERFORM despite lowering TP to RM3.00 (from RM3.72) or an ex-all TP of RM2.63, following lower FY18E EPS of 14.7 sen (Fully Diluted: 12.2 sen) based on a slightly lower FY18E Target PER of 20.5x (from 21.5x) on assumptions of slightly weaker margins, but this is still slightly higher than SCGM’s Target PER of 19.9x due to its lower CNP margins of 13.6-13.3% in FY18-19. We are comfortable with our valuations for now as SLP will still see strong growth and margin improvements in FY18 through its export-driven expansion. At current levels, SLP is commanding attractive 26% total returns.

Source: Kenanga Research - 07 Aug 2017