1Q18 core net profit of RM5.5m is below our estimate (18%) but within consensus (20%). Top-line is within expectations (24%), but we believe the deviation from our estimates is due to weaker 1Q18 EBIT margins of 13% vs. our estimate of 16%, likely on higher-than- expected raw material cost or other operating expenses in 1Q18. We will seek further clarification from management from the briefing later today. A first interim dividend of 1.50 sen was declared, implying 1Q18 total dividend of RM2.18m or 1.13 sen post accounting for the enlarged share base from the bonus issue (completed in Jul 2017). This is also below our expectation at 16% of FY18E dividend of 7.20 sen (2.4% yield).

Result highlights. QoQ, top-line was up by 1% from stronger local and export sales, while lower effective tax rates of 16.6% (vs. 23.0% in 4Q17) gave precedence for CNP to increase by 4%. YoY-Ytd, top-line growth was strong, up by 42% on local and export sales, likely boosted by the lunch boxes and plastic cups growing sales. However, CNP was only up by 5% as; (i) EBIT margin compression by 4.0ppt, and (ii) higher effective tax rates of 16.6% (vs. 14.4% in 1Q17) weighed down on top-line growth.

Outlook. The Group was the silver sponsor for the 2017 South East Asian Games as well as the ASEAN Para games in Kuala Lumpur in 3QCY17, which should bode well for sales of disposable lunch boxes and cups. The Group’s longer-term expansion plans include a new plant targeted for completion in Dec 2018 (FY19) which will boost production capacity to 67.6k MT/year. As such, we are expecting FY18-19E capex of RM60-54m, with FY18E capex to be utilised for; (i) the 2nd factory construction in Kulai, and (ii) the new Klang Valley rented factory, while FY19 capex of RM54m will be utilised for the Kulai factory construction. All in, we expect FY18-19E effective tax rates of 13-18% as SCGM will benefit from reinvestment tax allowance.

We make no changes to FY18-19E NPs of RM30.9-38.1m for now, pending the results briefing later today. However, we caution for a slight downward bias to earnings due to EBIT margin compressions in 1Q18. We seek further clarification from management, and may look to trim earnings if the current weak EBIT margins persist.

Maintain MARKET PERFORM and FD Ex-all TP of RM3.35. We make no changes to our FD Ex-all TP which is based on a FD CY18E EPS of 16.8 sen (post accounting for the bonus issue and full conversion of warrants) and an unchanged Fwd. PER of 19.9x based on a slight discount to SLP’s Fwd. PER of 20.5x due to SLP’s better margins and higher ROEs. We maintain our MARKET PERFORM call for now, but our call and TP are subject to review pending the outcome of the results briefing today.

Risks to our call include; (i) higher-than-expected resin cost, (ii) weaker product demand from overseas, (iii) foreign currency risk from strengthening Ringgit, and (iv) new entrants/competition biting into its market share.

Source: Kenanga Research - 08 Sep 2017