FY19 core net profit of RM21.2m came below our expectation at 89%. No consensus available. However, the FY19 dividend of 5.5 sen is within (at 105%). Lower FY20E CNP by 9% to RM23.0m on lower utilisation rates and introduce FY21E CNP of RM24.8m. Although we lower our TP to RM1.20 (from RM1.45), its attractive dividends and stable margins compelled a stay on the OP rating.

FY19 core net profit of RM21.2m below our expectation at 89%. No consensus is available. However, 4QFY19 dividend of 1.5 sen brought FY19 dividend to 5.5 sen, within our expectation (at 105% of our 5.3 sen estimate).

Results’ highlights. YoY, top-line was down by 11.3% mostly on lower domestic sales as well as slower demand of flexible packaging products. As a result, CNP declined by 17% on the back of higher effective tax rate of 16% (vs. 11%). QoQ, top-line was also down 11% on the back of weaker demand and lower selling prices for domestic and flexible packaging products. All in, CNP was down by 32% on higher tax rates of 23% (vs. 17%).

Outlook. We expect capex allocation of RM10m each in FY20-21, with the Group remaining in a strong net cash position. FY19-20 capex is slated for capacity expansion and funded by internal funds. SLP plans to increase capacity gradually up to 38k MT (+23%) by FY21-22, and we expect average utilisation rates of between 60-65%.

Lower FY20E CNP by 9% to RM23.0m on lower utilisation rates, and introduce FY21E CNP of RM24.8m. We lower FY20 utilisation rates to 62% (from 65%) given the challenging demand environment, while we are slightly more optimistic on FY21 utilisation rate at 65%. We opt to be conservative for now as buyers adopt a wait-and-see approach in light of declining raw material prices, but we believe buying momentum will pick up once raw material prices stabilise, leading to improving earnings and better margins. FY20-21E dividend of 5.1-5.5 sen imply yields of 4.7-5.1%.

Maintain OUTPERFORM but on a lower TP of RM1.20 (from RM1.45) posts lowering our FY20E EPS to 7.2 sen (from 7.9 sen) and on a lower target PER of 16.5x (from 18.0x) based on -0.5SD to the 5-year historical average given weaknesses in plastic demand. Even so, we maintain our OP call as we favor SLP for its favorable margins (c.15% EBIT) vs. other plastic packagers under our coverage of 5-6% (save for TOMYPAK) and strong net cash position, solidifying its ability to pay attractive dividends while we expect demand for plastic products to improve over the longer run once raw material prices stabilise.

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 - 27 Feb 2020