9M17 core earnings of RM13.5m came in below our expectation (51%) on continued weak margins in 3Q17 mostly due to the sales mix on slower rollout of higher margin products. The second interim dividend of 1.5 sen implying 2.7 sen post placement and bonus issue is within expectations (81%). As such, we trim FY17-18E earnings by 30-13% to RM19-30m. Downgrade to MARKET PERFORM on lower TP of RM1.83.

9M17 core net profit of RM13.5m is below our expectations, achieving only 51% of our FY17 estimate. No consensus is available.This is the 3rd consecutive quarter of results coming below expectations. Top-line came in within our expectations at 72%, but bottom-line came in below due to margin compression from: (i) one-off expenditure for the corporate exercise of RM0.8m, (ii) slightly higher labour cost arising from overtime payments as a result of fewer working days in Sept 2017 due to more public holidays, and mostly resulting from (iii) lower-than-expected contribution from the healthcare product segment which commands far better margins than kitchen bags and MaxInflax products. We had expected significantly stronger quarters in 2H17 from the roll-out of the healthcare products, but this will likely be pushed to FY18 as the first line will only be commissioned by end Nov 2017 (vs. our expectation by 3Q17). To recap, we expect the healthcare segment to contribute 8-10% of revenue in FY17-18 vs. c.3% in 9M17.

A second interim dividend of 1.5 sen was announced implying 9M17 total dividend of 2.7 sen post accounting for the bonus issue (completed Aug-17) and 6.8% private placement (completed July-17). This is within our expectation, at 81% of our FY17E dividend of 3.3 sen based on our 40% dividend pay-out assumption, in line with the Group’s dividend policy while SLP has paid out 59% for 9M17(refer overleaf).

Results Highlights. Ytd-YoY, top-line was up by 5.7% on flexible packaging and domestic sales. However, operating profit and PBT were down by 14.7% each due to a change in sales mix with increased sales of lower margin products and higher resin prices especially in 1H17. Coupled with higher effective tax rates at 17.4% (from 15.2% in 9M16), CNP was lower by 33%. QoQ, topline was up on better sales (+6.1%) on similar reasons mentioned above. Flattish PBT margin of 11.9% was maintained as there were no significant changes in the sales mix. All in, bottom-line increased by 10.7% post stripping out forex gains.

Slashing FY17-18E by 30-13% to RM19-31m post; (i) accounting for the higher expenditure of RM0.8m from the corporate exercise, (ii) compressing our margins on lower sales for the healthcare products which we expect to differ mostly in FY18 (c. 6% of revenue from 10% previously). As such, we lower CNP margins closer to current levels of 10-13% in FY17-18E (vs. 14-15% previously).

Downgrade to MARKET PERFORM and lower TP to RM1.83 (from OP and TP of RM2.13) following lower FY18E EPS and FY18E Target PER of 18.7x (from 19.0x). Our Target PER assumption is based on SLP’s slower growth rate and slightly weaker margins vs. consumer packager SCGM (Target PER of 19.6x) and above TOMYPAK (18.7x) on better margins. We are comfortable with our valuations for now but may look to re-evaluate our PER assumptions further should SLP continue to underperform. We are comfortable with our call as we expect FY18 to bounce back and see stronger growth and margin improvements through its export-driven expansion.

Source: Kenanga Research - 06 Nov 2017