9MFY21 CNP of RM13.6m came below expectation, at 63% of our full-year estimate. 3QFY21 DPS of 1.5 sen brought 9MFY21 DPS to 4.0 sen, which is as expected. QoQ, net profit was lower due to production disruption and a limited workforce capacity and thus lower output. We continue to like SLP on resilient demand for its products and elevated ASPs. Decrease FY21E earnings by 10% on lower revenue and production disruption in 3QFY21. Maintain FY22E estimates and DPS of 5.5 sen in FY21-FY22 each, yielding 5.9%. Reiterate OP with new TP of RM1.18 based on FY22E EPS of 7.1 sen at 16.6x PER, at 0.5SD below the 5-year mean.

9MFY21 CNP below estimate. 9MFY21 revenue/CNP of RM123.7m/RM13.6m came below our expectation, at 69%/63% of full-year estimate. The deviation was mainly due to production disruption. 3QFY21 DPS of 1.5 sen brought 9MFY21 DPS to 4.0 sen, which is in line with our DPS estimate of 5.5 sen.

YoY, revenue rose 16.7% driven by higher sales volume and ASPs from the manufacturing and trading segments. Operating profit rose by a lower 8.7% due to higher production costs which lowered operating margin from 15.2% to 14.2%. On the back of a lower effective tax rate, CNP rose 10.3% to RM13.6m.

QoQ, revenue declined by 12.9% due to a decrease in sales volume from the manufacturing segment. Despite the higher revenue in trading segment due to higher resin prices, manufacturing sales fell by c.10%, mainly due to the production disruption caused by the 60% workforce limit and temporary halt in production. Operating profit fell 34.8% due to higher Covid-19 related expenses and higher production costs. Accordingly, CNP fell by 30.6% to RM3.1m due to the weaker sales and higher operating expenses.

Outlook. As the economy reopens, we remain optimistic on SLP’s ability to: (i) fulfil the strong demand for its products, (ii) maintain elevated ASPs on higher resin prices in 2HCY21, and (ii) further ramping up of utilization rate which stood at 60-65% (vs. 40-45% during lockdown, and 35% in the 3QFY21). Recently, resin prices have risen to the peak level seen in March 2021, and we expect ASPs will remain elevated. We assume that increase in ASPs will allow SLP to maintain its superior margins in the subsequent quarters while resin prices fluctuate. We continue to assume an average resin cost of USD1,100/MT for SLP in FY21, in line with SLP’s average resin cost YTD.

Decrease FY21E and maintain FY22E estimates. We decrease FY21E revenue/CNP by 5.5%/10% mainly to adjust lower revenues and production disruption in 3QFY21. However, we maintain FY22E estimates and DPS of 5.5 sen each for FY21E and FY22E, implying 5.9% yield.

Reiterate OUTPERFORM with new TP of RM1.18 (from RM1.14), as we roll forward our valuation to FY22E EPS of 7.1 sen, with an ascribed forward PER of 16.6x, which is -0.5SD to its 5-year mean of 20x. We maintain our valuation to reflect SLP’s lower utilization rate compared to its peers. We remain optimistic of the resilient demand for SLP’s flexible packaging products, and its improving product mix.

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

Source: Kenanga Research - 8 Nov 2021