9MFY19 core net profit of RM17.4m came within our expectation at 73%. No available consensus. However, the 9MFY19 dividend of 4.0 sen exceeded our expectations (at 89%) on a higher-than-expected payout ratio of 73%. Maintain FY19-20E CNP of RM23.8-25.1m but increase our dividend payout ratio. Upgrade to OP (from MP) on an unchanged TP of RM1.45 as valuations appear attractive at current levels.

9MFY19 core net profit of RM17.4m came in well within our expectation at 73%. No consensus is available. 3QFY19 dividend of 1.5 sen brought 9MFY19 dividend to 4.0 sen, above our expectation (89% of our FY19E dividend of 4.5 sen) on a higher-than-expected payout ratio of 73% (vs. ours of 60%), while the Group has a 40% minimum payout policy.

Results’ highlights. YoY-Ytd, top-line was down by 8.4% mostly on lower domestic sales as well as slower demand of flexible packaging products. That said, PBT margin was up slightly (+0.4ppt) on better product mix, while the lower effective tax rate (-2.1ppt) minimised bottom-line impact as CNP only declined by 3.5%. QoQ, top-line was down by 1.4% on lower contribution from domestic sales, while the higher effective tax rate of 16.7% (vs. 8.7%) caused CNP to decline by 14.1%.

Outlook. We expect capex allocation of RM10-10m in FY19-20, with the Group remaining in a strong net cash position. FY19-20E capex is slated for capacity expansion and funded by internal funds. SLP plans to increase capacity gradually up to 38k MT (+23%) by FY21, and we expect average utilisation rates of between 60-70%.

Maintain earnings. We make no changes to FY19-20E CNP of RM24- 25m, increase FY19-20E dividend to 5.3-5.6 sen (from 4.5-4.8 sen) on a higher dividend payout ratio of 70% (from 60%) which is closer to the current 9MFY19 payout level of 73%, while FY18A dividend payout ratio was 56%. This implies 4.2-4.5% yield in FY19-20.

Upgrade to OUTPERFORM (from MARKET PERFORM) on an unchanged TP of RM1.45. We make no changes to our valuations which are on an unchanged target PER of 18.0x based on 4-year historical average on FY20E EPS of 7.9 sen. However, we believe our call upgrade is warranted at the current levels, as the share price has retraced from its YTD’s high of RM1.41 in recent weeks (-12%) while results have met expectations, and we expect the Group to continue improving its product mix and utilization going forward. We continue to like SLP as it 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) lower-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 - 11 Nov 2019