1H18 core earnings of RM11.8m came in within our expectation (55%). 1H18 dividend of 1.5 sen was also within (55%). We expect capacity to increase gradually to 38k MT (+58%) by FY19. Maintain FY18-19E CNP. Share price has done well (+26%) since our buy call in June 2018. We downgrade to MP (from OP) but increase TP to RM1.20 (from RM1.00) on a higher target PER of 18.0x as results have continued to meet expectations, unlike peers.

1H18 core net profit of RM11.8m is within our expectation, achieving 55% of our FY18 estimate. No consensus is available. 1H18 dividend of 1.5 sen was declared, also within, at 55% of our FY18E dividend of 2.7 sen

Results Highlights. YoY, top-line was flattish (-0.8%), but operating profit margin improved by 2.0ppt to 15.5% on a better sales mix from the roll-out of higher margin products. Additionally, effective tax rate was lower at 14.1% (vs. 19.2% in 1H17) due to availability of tax incentives this quarter. As a result, CNP increased by 33% to RM11.8m. QoQ, top-line was also flattish at 0.5%, but operating profit margin improved by 2.5ppt likely due to similar reasons mentioned above. Lower effective tax rate of 11.0% (vs. 17.8% in 1Q18) allowed CNP to increase by 28%.

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 and funded by share placement and internal funds. SLP plans to increase capacity up to 38k MT (+58%) by FY19, while we expect conservative utilisation rates of 60-65%. We believe net margin could continue to improve in 2H18 from roll-out of higher margin products at an average resin cost of USD1,350/MT in FY18-19.

Maintain FY18-19E CNP of RM22-23m. We make no changes to our earnings estimates as we expect 2Q18 onwards to be stronger quarters from increased capacity albeit likely to be gradual up to 38k MT by FY19 (vs. 24k MT in FY17A). Additionally, we maintain our effective tax rates of 16-21% in FY18-19 from reinvestment allowances.

Downgrade to MARKET PERFORM but increase TP to RM1.20 (from RM1.00) based on an unchanged FY18E EPS of 6.8 sen but with a higher Target PER of 18.0x (4-year historical average) from 15.0x (- 0.5SD on 4-year historical average) as SLP has been constantly meeting expectations over the last three quarters unlike peers, and thus we believe fundamentals are more stable going forward. Furthermore, SLP has better margins (12% EBIT) vs. plastic packagers under our coverage of 5-8%, and the strongest CNP growth rate of +13% (2-year average) vs. plastic packagers under our coverage of between -9% to +10%, which are valued at -1.0 SD PER and -2.0 SD PBV valuations. However, we downgrade our call to a MARKET PERFORM as SLP’s share price has done well, increasing 26% since our buy call on 29th June 2018 and being our Top Pick for 3Q18. With most upsides already priced in, we are comfortable with our MARKET PERFORM call and TP of RM1.20.

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 - 06 Aug 2018