FY17 core earnings of RM18.3m came in within our expectation (99%). Third interim dividend of 1.50 sen, implying 4.17 sen post placement and bonus issue is above expectations (126%) as the Group paid out 68% of profit vs. our assumption of 40%. We lower FY18E CNP by 10% to RM27m on more conservative margin assumptions, and introduce FY19E CNP of RM31. Maintain MARKET PERFORM on lower TP of RM1.55 (from RM1.75).

FY17 core net profit of RM18.3m is within our expectation, achieving 99% of our FY17 estimate. No consensus is available. A third interim dividend of 1.5 sen was announced implying FY17 total dividend of RM13.2m or 4.17sen post accounting for the bonus issue (completed Aug 2017) and 6.8% private placement (completed July 2017). This is above our expectations at 126% of our estimate of 3.3 sen based on our 40% dividend pay-out assumption in line with the Group’s dividend policy, while SLP paid out 68% for FY17.

Results Highlights. Ytd-YoY, top-line was up by 6.8% on flexible packaging and domestic sales. However, operating profit was down by 16.7% due to a change in sales mix on increased sales of lower margin products and higher resin prices, especially in 1H17. Coupled with higher effective tax rates at 21.3% (from 13.1% in FY16), CNP declined by 37.5%. QoQ, top-line was down marginally (-1.7%). However, CNP managed to increase by 1.4% on the back of; (i) higher operating profit (+27.4%) possibly due to lower raw material cost, but was weighed down by (ii) higher taxation (+197%).

Outlook. All in, we expect capex allocation of RM13-15m in FY18-19 with the Group remaining in a net cash position. FY18-19E capex will be for capacity expansion as well as the new storage warehouse, and will be funded by share placement and internal funds. SLP plans to increase capacity by up to 38k MT (+58%) by FY19. We expect net margin to improve in 2H18 from roll out of higher margin products on an average resin cost of USD1,200/MT in FY18-19.

Trimming FY18E by 10% to RM27m, and introduce FY19 CNP of RM31m. We lower FY18E CNP as we choose to be more conservative on margin assumptions going forward pending the roll out of SLP’s higher margin products (i.e. healthcare segment). As such, we lower FY18 CNP margins to 12%, closer to FY17 levels of 10% (vs. 14% previously), and introduce FY19 CNP margins of 13%. We may look to increase our margin assumptions once we see more concrete margin improvements in coming quarters.

Maintain MARKET PERFORM but lower TP to RM1.55 (from RM1.75) post lowering our FY18E EPS on an unchanged FY18E Target PER of 18.7x. Our Target PER assumption is based on SLP’s slower growth rate and slightly weaker margins vs. consumer packager SCGM (target PER of 19.2x) and above TOMYPAK (18.3x) on better margins. We are comfortable with our call for now as we have priced in most of the upsides, with expectations of FY18 YoY growth and margin improvements through its export-driven expansion and better product mix.

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 - 26 Feb 2018