1H19 core net profit of RM11.7m came within our expectation at 49%. No available consensus. However, the 1H19 dividend of 3.0 sen surpassed expectation (at 80%) on a higher-than-expected payout ratio of 81%. Maintain FY19- 20E CNP of RM23.8-25.1m but increase our dividend payout ratio. Upgrade to OP (from MP) with a higher TP of RM1.45 (from RM1.35) post rolling forward to FY20E estimates.

1H19 core net profit of RM11.7m came in well within our expectation at 49%. No consensus is available. 2Q19 dividend of 1.5 sen brought 1H19 dividend to 3.0 sen, above our expectation (80% of our FY19E dividend of 3.8 sen) on a higher-than-expected payout ratio of 81% (vs. ours of 50%), while the Group has a 40% minimum payout policy.

Results highlights. YoY-Ytd, top-line was down marginally by 2.5% on slower domestic sales. That said, PBT margin was fairly flattish at 15.5% (vs. 15.6%) on better cost management, causing PBT to only decline by 1.5%. As a result, CNP only declined by 0.3% on a slightly lower effective tax rate of 13.3% vs. 14.1%. QoQ, top-line was rather flattish, up 0.3% but PBT margin improved by 1.8ppt likely due to lower raw material cost this quarter and better product mix. All in, CNP was up by 28% on a lower effective tax rate of 8.7% (vs. 18.6%).

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 (+38%) by FY21, and we expect average utilisation rates of between 60-70%.

Maintain FY19-20E CNP of RM24-25m for now. However, we increase FY19-20E dividend to 4.5-4.8 sen (from 3.8-4.0 sen) on a higher dividend payout ratio of 60% (from 50%) which is closer to the current 1H19 payout level of 81%, while FY18A dividend payout ratio was 56%. This implies 3.6-3.8% yield in FY19-20.

Upgrade to OUTPERFORM (from MARKET PERFORM) on a higher TP of RM1.45 (from RM1.35) post rolling forward to FY20E EPS of 7.9 sen (from 7.5 sen) on an unchanged target PER of 18.0x based on 4-year historical average. We believe our upgrade is warranted at the current level, as the share price has retraced from its YTD’s high of RM1.32 in recent weeks (-5%) and we expect the Group to continue improving its product mix and utilization going forward. We like SLP as it also commands premium margins (c.15% EBIT) vs. other 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 - 5 Aug 2019