SLP expected to improve product mix, utilisation

TheEdge Tue, Aug 06, 2019 10:25am - 4 years View Original


SLP Resources Bhd
(Aug 5, RM1.30)
Upgrade to outperform with a higher target price (TP) of RM1.45:
SLP Resources Bhd’s first half of financial year 2019 (1HFY19) core net profit of RM11.7 million came in well within our expectations at 49%. No consensus is available. Its dividend of 1.5 sen in the second quarter of FY19 brought 1HFY19 dividend to three sen, above our expectations of 80% of FY19 dividend of 3.8 sen, on a higher-than-expected payout ratio of 81% versus ours of 50%, while the group has a 40% minimum payout policy.

Year-on-year and year to date (YTD), the top line was marginally down by 2.5% on slower domestic sales. That said, its profit before tax (PBT) margin was fairly flattish at 15.5% versus 15.6% on better cost management, causing the PBT to decline only 1.5%. As a result, its core net profit (CNP) declined only 0.3% on a slightly lower effective tax rate of 13.3% versus 14.1%. Quarter-on-quarter, the top line was rather flattish, up 0.3% but its PBT margin improved by 1.8 percentage points, likely due to a lower raw material cost in this quarter and a better product mix. All in, its CNP was up 28% on a lower effective tax rate of 8.7% versus 18.6%.

We expect a capital expenditure (capex) allocation of up to RM10 million for FY19 and FY20, with the group remaining in a net cash position. The FY19 and FY20 estimate capex is slated for capacity expansion and funded by the previous share placement and internal funds. SLP plans to increase capacity gradually up to 38,000 tonnes or 38% by FY21, and we expect average utilisation rates of between 60% and 70%.

We maintained our FY19 and FY20 estimated CNP of RM24 million to RM25 million for now. However, we increased the FY19 and FY20E dividend to 4.5 sen to 4.8 sen, from 3.8 sen to four sen, on a higher dividend payout ratio from 50% to 60% — closer to the current 1H19 payout of 81%, while the FY18 dividend payout ratio was 56% — implying a 3.6% to 3.8% yield in FY19 and FY20.

We upgraded the stock to “outperform” from “market perform”, with a higher TP of RM1.45 from RM1.35, after rolling forward to FY20E earnings per share of 7.9 sen from 7.5 sen, on an unchanged TP-earnings ratio (PER) of 18 times based on its four-year historical average. We believe our upgrade is warranted at the current level, as the share price has retraced from its YTD’s high of RM1.32 in recent weeks (-5%) and we expect the group to continue improving its product mix and utilisation moving forward.

We like SLP as it also commands premium margins of about 15% earnings before interest and tax versus other plastic packagers under our coverage of 5% to 6% except for Tomypak Holdings Bhd — all valued at -1 standard deviation (SD) PER and -2 SD price-to-book valuations. Risks to our call include a higher- or lower-than-expected resin cost, a 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, Aug 5

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