1Q18 core earnings of RM5.2m came in within our expectation (at 20%). No dividend, as expected. Going forward, SLP plans to ramp up capacity over FY18-19 to 38k MT (+58%). We maintain FY18-19E CNP of RM26-30m. Despite the steep YTD losses (-45%), on expectations of better quarters ahead, we look to upgrade SLP to OUTPERFORM (from MP) on an unchanged TP of RM1.30.

1Q18 core net profit of RM5.2m is within our expectation, achieving 20% of our FY18 estimate. No consensus is available. No dividends as expected.

Results Highlights. QoQ, top-line was down by 2.0% on a weaker US dollar which drives export sales. As a result, PBT declined by 9.3% on the back of slightly lower PBT margin (-1.2ppt). However, CNP increased (+7.7%) on a lower effective tax rate of 17.8% (vs. 31.1% in 4Q17). YoY, top-line was down by 3.9% due to similar reasons mentioned above, and despite higher sales volume. This translated to slightly lower PBT margins (-0.6ppt) on the back of lower operating profit (-8.1%). Nevertheless, CNP increased by 12.5% on lower effective tax rates and after excluding a RM0.5m unrealised gain on derivatives.

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 up to 38k MT (+58%) by FY19. We expect net margin to improve in 2H18 from rollout of higher margin products on an average resin cost of USD1,250/MT in FY18-19.

Maintain FY18-19E CNP of RM26-30m. We maintain our earnings estimates for now as we expect stronger quarters in coming months from increasing capacity as we target 32-38k MT in FY18-19 (vs. 24k MT in FY17A). Additionally, we expect a lower effective tax rate of 15.6% in FY18 (vs. 17.8% currently) from reinvestment allowances.

Upgrade to OUTPERFORM (from MP) but maintain TP of RM1.30

based on an unchanged FY18E EPS and Target PER of 16.1x. Our Target PER assumption is based on SLP’s stronger growth rate and slightly better margins vs. consumer packager SCGM (Target PER of 16.0x) and TOMYPAK (Target PER of 15.2x). We believe SLP is attractive at the current levels in light of the steepest sell-down among peers YTD at 45% (vs. peers of 14-43%), even though 4Q17 and 1Q18 results met our estimates, and on expectations of better quarters ahead. We are comfortable with our call for now as we believe we have priced in most of the earnings risk, 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 - 7 May 2018