FY18 core earnings of RM25.5m came well within our expectations at 102%. However, FY18 dividend of 4.5 sen was above (143%) on a higher-than-expected payout ratio. Maintain FY19E CNP and introduce FY20E. Strong appreciation pushing share price (by 25% since Oct 2018) closer to our TP warrants us to downgrade our call to MARKET PERFORM (from OP) with an unchanged TP of RM1.35, as most positives could have been priced in.
 

FY18 core net profit of RM25.5m is well within our expectations, achieving 102% of our FY18 estimates. No consensus is available. However, 4Q18 dividend of 1.5 sen brought FY18 dividend to 4.5 sen (3.4% yield), which came in above our FY18E dividend of 3.2 sen at 143%. The deviation for the dividend was due to management’s higher payout ratio of 56% in FY18 while we had expected 40% as per the minimum payout ratio. Note that management had paid out dividends at between 40% to 71% payout ratios over the past five years.

Results Highlights. YoY, top-line was up by 4.4% on higher sales from both local and export markets, while operating profit margin improved by 1.5ppt, on better economies of scale. This was topped off with a lower effective tax rate of 10.9% (vs. 21.3% in FY17) due to reinvestment allowance, causing CNP to increase by 39%. QoQ, top- line was down by 9.2% on slightly lower sales, topped off by a slight setback on the operating profit margin, which was down 0.75ppt likely due to lower margin products. However, CNP increased by 19.4% offset by positive tax vs. an effective tax rate of 21% in 3Q18.

Outlook. We expect capex allocation of RM10-10m in FY19-20, with the Group remaining in a net cash position. FY19-20E capex will be for capacity expansion and funded by share placement and internal funds. SLP plans to increase capacity gradually up to 38k MT (+58%) by FY21, and we expect average utilisation rates of between 60-70%.

Maintain FY19E CNP of RM24m and introduce FY20E CNP of RM25m. However, we increase FY19 dividend payout ratio to 50% (from 40%), closer to current level. We increase FY19E dividend to 3.8 sen (from 3.0 sen) and introduce FY20E dividend of 4.0 sen (implying 2.9-3.0% yields in FY19-20).

Downgrade to MARKET PERFORM (from OP) on an unchanged TP to RM1.35 on FY19E EPS of 7.5 sen and an unchanged target PER of 18.0x (4-year historical average). Our downgrade follows SLP’s positive share price performance, which is up 25% since our OP call in Oct 2018 (refer to report dated 5th Oct 2018, ‘Margin Pressures Persist’). We believe most positives have been priced in at current levels, but may look to increase earnings as well as valuations should we see further top-line and margin improvements. Note that SLP does command premium valuations vs. its packager peers due to its better margins (c.15% EBIT) vs. plastic packagers under our coverage of 5- 6% (save for TOMYPAK), which are valued at -1.0SD PER and -2.0SD PBV valuations.

Risks to our call include: (i) higher/lower-than-expected resin cost, (ii) weaker/stronger 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 - 25 Feb 2019