1Q19 core net profit of RM5.1m came within our expectation at 22%. No consensus available. 1Q19 dividend of 1.0 sen was also within (at 27%). SLP plans to increase capacity gradually up to 38k MT (+58%) by FY21, and we expect average utilisation rates of between 60-70%. Maintain FY19- 20E CNP of RM23.8-25.1m but downgrade our call to MP (from OP) on limited upsides. Maintain TP of RM1.35.

1Q19 core net profit of RM5.1m came in well within our expectation at 22%. No consensus is available. 1Q19 dividend of 1.0 sen was also within at 27% of our estimated 3.8 sen (implying 2.9% yield). We are targeting a 50% payout ratio in FY19 (vs. 56% in FY18).

Results Highlights. YoY, top-line was down by 2.5% on slower domestic sales, but this was partially offset by better exports mainly to Japan. As a result, PBT margin improved slightly by +0.5ppt as export products command better margins than domestic products. All in, CNP was down marginally (-0.2%) on a higher effective tax rate of 18.6% (vs. 17.8%). QoQ, top-line was down by 9.0% due to similar reasons mentioned above (i.e. weaker domestic sales). However, impact to bottom-line was exacerbated by higher effective tax rates of 18.6% vs. a positive tax in 4Q18.

Outlook. We expect capex allocation of RM10-10m in FY19-20, with the Group remaining in a net cash position. FY19-20E capex is slated for capacity expansion and funded by the previous 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%. *Note that we make no changes to FY19-20E CNP of RM24-25m. FY19-20E dividend of 3.8-4.0 sen implies 2.9-3.1% yield, respectively.

Downgrade to MARKET PERFORM (from OP) on an unchanged TP of RM1.35 on FY19E EPS of 7.5 sen and an unchanged target PER of 18.0x based on the 4-year historical average. We believe our downgrade is timely with SLP’s positive share price performance which is up 10% YTD on the back of fairly stable earnings that have continued to meet our expectations, unlike peers under our coverage. However, we believe most positives have been priced in at current levels, and we may only 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 - 6 May 2019