1QFY20 core net profit of RM4.0m came in within our expectation at 25% of full-year estimate. No available consensus. However, dividend of 1.0 sen came above forecast (at 40%). Maintain FY20-21E CNP of RM15.8-24.8m on conservative utilisation rates of 58-67%. Maintain UNDERPERFORM with unchanged TP of RM0.625 (based on -1.5SD on FY20E PER) as we opt to remain conservative in light of weak demand and the uncertainty caused by the Covid-19 pandemic.

1QFY20 core net profit of RM4.0m came in well within our expectations at 25% of full-year estimate. No consensus is available. Meanwhile, 1QFY20 dividend of 1.0 sen is above our expectation at 40% of our FY20E dividend of 2.5 sen due to a higher-than-expected payout ratio of 80% vs. our expectations of 50%.

Results’ highlights. YoY, 1QFY20 revenue was down by 21% mostly on lower export sales to Japan, Europe and Australia. As a result, CNP declined by 23% on the back of higher effective tax rate of 24% (vs. 19%). QoQ, revenue was also down, by 10%, due to similar reasons mentioned above. However, CNP was up by 3% on slightly better EBIT margin (+2.0ppt) due to lower raw material cost.

Outlook. Given the Group’s strong net cash position of RM76.8m, we believe it is in a comfortable position to allocate internal funds for capex plans if required. However for now, given the uncertainty of the Covid- 19 situation, we believe that the Group would prioritise ramping up unutilised capacity over increasing capex.

Maintain FY20-21E CNP of RM15.8-24.8m. We believe our conservative FY20 estimates are justified given lower product demand globally caused by the Covid-19 pandemic while some buyers may adopt a wait-and-see approach in light of declining raw material prices. Note that we previously did not make any revisions to our FY21E CNP which is also maintained now as we expect the Covid-19 situation to improve, but given the fluidity of the situation, we remain cautious and will continue to monitor the state of affairs in coming months more closely. All in, for FY20-21, we are expecting average utilisation rates of 58-67% and dividend of 2.5-5.5 sen implying yield of 2.8-6.2%, respectively.

Maintain UNDERPERFORM with unchanged TP of RM0.625 based on FY20E EPS of 5.0 sen and a 12.5x PER valuation which is - 1.5SD to 5-year historical average. SLP is in a defensive position due to its strong net cash position, solidifying its ability to withstand market challenges and also pay decent dividend yields in the near term. We also expect demand for plastic products to recover and improve over the longer run. However, we maintain SLP Resources at UNDERPERFORM as we remain conservative on the entire sector for now given the weaknesses and uncertainty in plastic demand in light of Covid-19. As such, we have applied a -2.0SD to -1.0SD valuation for plastic packagers under our coverage for now.

Risks to our call include: (i) lower-than-expected resin cost, (ii) higher product demand from Japan, and (iii) foreign currency risk from weakening Ringgit.

Source: Kenanga Research - 14 May 2020