SLP expected to expand capacity with RM10m capex in FY19, FY20

TheEdge Tue, May 07, 2019 10:41am - 4 years View Original


SLP Resources Bhd
(May 6, RM1.26)
Downgrade to market perform (MP) with an unchanged target price (TP) of RM1.35:
SLP Resources Bhd’s first quarter of financial year 2019 (1QFY19) core net profit of RM5.1 million is within our expectations at 22%. The 1Q19 dividend of one sen is also within, at 27% of our estimated 3.8 sen, implying a 2.9% yield. We are targeting a 50% payout ratio in FY19 versus 56% in FY18.

 
Year-on-year, SLP’s top line was down 2.5% on slower domestic sales, partially offset by better exports mainly to Japan. As a result, the profit before tax margin improved slightly by +0.5 percentage point as export products commanded better margins than those of domestic products. All in, core net profit (CNP) was down marginally (-0.2%) on a higher effective tax of 18.6% versus 17.8%. Quarter-on-quarter, the top line was down 9% due to weaker domestic sales. However, the impact on the bottom line was exacerbated by a higher effective tax of 18.6% versus a positive tax in 4QFY18.

We expect a capital expenditure (capex) allocation of RM10 million in FY19 and FY20, with the group remaining in a net cash position. FY19 and FY20 estimate capex is slated for capacity expansion, funded by the previous share placement and internal funds. SLP plans to increase capacity gradually up to 38,000 tonnes or +58% by FY21, and we expect average utilisation rates of between 60% and 70%. Take note that we made no changes to our FY19 and FY20E CNP of RM24 million to RM25 million. The FY19 and FY20E dividend of 3.8 sen to four sen implies 2.9% to 3.1% yields respectively.

We downgraded the stock to “MP” from “outperform” on an unchanged TP of RM1.35, on FY19E earnings per share of 7.5 sen and an unchanged price earnings ratio (PER) of 18 times based on a four-year historical average. We believe our downgrade is timely with SLP’s positive share price performance, up 10% year to date on fairly stable earnings, has continued to meet our expectations, unlike its peers under our coverage.

However, we believe most positive factors have been priced in at the current levels, and we may only look to increase earnings as well as valuations if we see further top line and margin improvements. Take note that SLP commands premium valuations versus those of its packager peers due to its better margins of about 15% earnings before interest and tax versus plastic packagers under our coverage of 5% to 6% (except for Tomypak Holdings Bhd), valued at -1 standard deviation (SD)  PER and -2 SD price-to-book value valuations.

Risks to our call include a higher- or lower-than-expected resin cost, weaker or stronger product demand from Japan of 25% to 30% of sales, foreign currency risk from a strengthening ringgit, and new entrants or competition biting into its market share. — Kenanga Research, May 6

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