This article first appeared in The Edge Financial Daily, on February 25, 2016.

SLP Resources Bhd 
(Feb 24, RM2.15)
Maintain market perform (MP) with a higher target price (TP) of RM2.26: Financial year ended Dec 31, 2015 (FY15) core net profit (CNP) of RM25.9 million came in slightly above our expectations at 106.8% of our full-year forecast of RM24.3 million. This was due to better-than-expected net margins (15.1% versus our 14.1%) from stronger contribution by premium products and export sales. Note that there are no consensus estimates.

Our CNP excludes fourth quarter ended Dec 31, 2015 (4QFY15) unrealised foreign exchange loss of RM1.2 million. 

A second interim dividend of 1.5 sen was declared, bringing FY15 dividend per share to 4.5 sen as per our forecast. This translates into a 2% dividend yield.

Quarter-on-quarter (q-o-q), top line was up by 7.4%, driven by higher sales volume mostly in the export markets, mainly to Japan. CNP margins improved to 17.9% on: (i) stronger US dollar to ringgit; (ii) higher contribution from premium products; (iii) installation of the new extrusion lines; and (iv) resin prices remaining stable at US$1,200 (RM5,076) per tonne range.

Year-on-year (y-o-y) year-to-date, top line was down slightly by 1.2% due to lower volume on domestic sales. However, profit before tax jumped 132.7% on other higher operating incomes (23.8%), and lower finance cost (-62.4%) as SLP Resources Bhd actively pares down its borrowings. Additionally, due to similar reasons mentioned above, CNP margins more than doubled to 15.1%, while CNP jumped 132.2%.

We expect the MaxInflax bag manufacturing capacity of 1,800 tonnes per year (doubling previous capacity), which kicked in 4QFY15, to fully contribute to FY16E (estimate) earnings. 

Expansion plans are intact as SLP intends to construct a new plant adjacent to its existing factory with a projected capacity of 14,000 tonnes (+58%). This could increase revenue by RM60 million to RM100 million in FY18.

No change to our FY16E CNP of RM29.7 million, and we introduce FY17, with an estimated dividend yield of 2.2% to 2.6%.

Maintain “market perform” given that most positives have been priced in after a stellar run-up, while we expect the share price to remain sticky at this juncture,given its margin improvement and export-driven expansion play. To encapsulate the full growth prospects of SLP, we roll forward our valuation base to FY17E from FY16E, while keeping our TP price-earnings ratio of 15.5 times unchanged, thus increasing our TP to RM2.26 (from RM1.87).

Risks include weaker product demand from Japan (25% to 30% of sales), foreign currency risk from a strengthening ringgit, and new entrants/competition biting into the market share. — Kenanga Research, Feb 24