9MFY20 core net profit of RM12.5m came in below our expectation at 65% as we had expected a stronger 2HFY20 post MCO. 9MFY20 DPS of 4.0 sen came within our expectation at 73% of our FY20E DPS of 5.5 sen. Hence, we lower FY20-21E CNP (by 11-15%) as recovery may not be as strong as expected and to remain conservative for now given rising Covid-19 cases. Downgrade to MARKET PERFORM (from OUTPERFORM) on lower TP of RM0.95 (from RM1.10).

9MFY20 CNP of RM12.5m came in below our expectation at 65% of full-year estimate as we were expecting a stronger 2HFY20 on higher utilisation rates as orders were presumed to have recovered from Covid-19-related lockdowns. 3QFY20 DPS of 1.5 sen (3QFY19: 1.5 sen) brought 9MFY20 dividend to 4.0 sen (9MFY19: 4.0 sen), in line (at 73%) with our FY20E dividend of 5.5 sen.

Results’ highlights. YoY-YTD, top-line was down by 18% as the Covid-19 pandemic-induced lockdowns disrupted global supply-chains, adversely affecting its export sales and sales volume. As a result, CNP decreased by a disproportionally larger quantum of 28%, also due to higher effective tax rate of 26% (vs. 16%) on a lack of tax incentives from Reinvestment Allowance. QoQ, revenue rose by 7% due to higher sales domestically and in Australia post the challenging MCO period in 2QFY20. All in, CNP margin was only slightly better at 12% (vs. 11%) after being partially offset by higher effective tax rate of 30% (vs. 24%).

Outlook. Given the uncertainty of the Covid-19 situation, we believe SLP will prioritise ramping up its utilisation rate over increasing capex. However, given its strong net cash position of RM73.1m, we believe SLP is in a comfortable position to maintain attractive dividends.

Decrease FY20-21E CNP by 11-15% to RM17.2-21.1m to account for the lower-than-expected sales momentum. As such, we expect lower FY20-21E utilisation rates of 60-65% (from 63-70%). However, given its strong net cash position, we believe they will be able to maintain their dividend at FY19 level of 5.5 sen. Our forecast dividend of 5.5 sen for FY21 implies attractive yield of c.6.0% at current levels.

Downgrade to MARKET PERFORM (from OUTPERFORM) on a lower TP of RM0.950 (from RM1.10) due to downward revision to our EPS forecast. Our target FY21 PER of 14.3x is unchanged, which is at - 1SD of its 5-year historical average. Our ascribed target PE multiple is below its historical average as we remain cautious of possible reduction in sales from domestic and export markets due to the worsening Covid- 19 situation.

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

Source: Kenanga Research - 9 Nov 2020