1HFY20 core net profit of RM7.9m is deemed above our expectation at 50% of full-year estimate as we expected a weaker 1H. No consensus is available. 1HFY20 dividend of 2.5 sen also came above forecast (at 100%). We increase FY20E CNP (+22%) to RM19.3m on expectation of better earnings in coming quarters from improved utilisation rates, while FY21E CNP of RM24.8m is maintained. Upgrade to MARKET PERFORM (from UP) on a higher TP of RM1.10 (from RM0.625) post rolling valuation forward to FY21E on higher PER of 14.3x @-1SD (from 12.5x PER @-1.5SD).

1HFY20 core net profit of RM7.9m came in above our expectation at 50% of full-year estimate as we expected a weaker 1H due to disruptions from Covid-19. No consensus is available. Meanwhile, 2QFY20 dividend of 1.5 sen brought 1HFY20 dividend to 2.5 sen is also above our expectation at 100% of our FY20E dividend of 2.5 sen due to a higher-than-expected pay-out ratio of 98% vs. our expectation of 50%.

Results’ highlights. YoY-Ytd, top-line was down by 20% due to the Covid-19 pandemic which disrupted its Japan and Australian sales. This coupled with a higher effective tax rate of 24% (vs. 13%) caused CNP to decline by 33%. QoQ, revenue picked up slightly by 2% on improved sales to Japan. However, the marginally higher tax rate of 24.2% (vs. 23.9%) resulted in CNP declining only slightly by 2.3%.

Outlook. Given the uncertainty of the Covid-19 situation, we believe SLP would prioritise ramping up its utilisation rate over increasing capex. Additionally, in light of its strong net cash position of RM76.4m, we believe SLP is in a comfortable position to declare better dividends.

Increase FY20E CNP by 22% to RM19.3m on expectation of improved utilisation rates in coming quarters to 63% (vs. 58% previously), while FY21E CNP is maintained at RM24.8m on 70% utilisation capacity. Additionally, given its strong net cash position, we believe they will be able to maintain dividend at FY19 level of 5.5 sen. Hence, we increase our forecast dividend pay-out ratio to 90% (from 50%) or 5.5 sen each for FY20 and FY21 (from 2.5 sen for FY20), implying 5.1% yields.

Upgrade to MARKET PERFORM (from UNDERPERFORM) on a higher TP of RM1.10 (from RM0.625) post rolling forward our valuation to FY21E EPS of 7.8 sen (from the previous FY20E EPS of 5.0 sen) and a higher 14.3x PER valuation @-1.0SD (from 12.5x PER at -1.5SD) to its 5-year historical average. We increase our valuations on expectations of improved earnings in coming quarters as orders are starting to improve. However, our valuations remain below historical average levels as we remain cautious of possible disruption to SLP’s export markets from a worsening Covid-19 situation.

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

Source: Kenanga Research - 10 Aug 2020

Source: Kenanga Research - 10 Aug 2020