This article first appeared in The Edge Financial Daily on November 12, 2019

SLP Resources Bhd
(Nov 11, RM1.23)
Upgrade to outperform with an unchanged target price (TP) of RM1.45: Nine months of financial year 2019 (9MFY19) core net profit (CNP) of RM17.4 million came within our expectations at 73%. No available consensus. However, the 9MFY19 dividend of four sen exceeded our expectations (at 89%) on a higher-than-expected payout ratio of 73%. We maintain our financial year 2019-2020 estimate (FY19-20E) of its CNP of RM23.8-25.1 million but increase our dividend payout ratio. We upgrade to “outperform” (from “market perform”) with an unchanged TP of RM1.45 as valuations appear attractive at the current levels.

9MFY19 CNP of RM17.4 million came in well within our expectations at 73%. No consensus is available. However, its third quarter of financial year 2019 (3QFY19) dividend payout of 1.5 sen that brought 9MFY19 dividend to four sen was above our expectations (89% of our FY19E dividend of 4.5 sen) on a higher-than-expected payout ratio of 73% (versus our estimate of 60%), while the group has a 40% minimum payout policy.

Year-on-year and year-to-date (YTD) top line was down by 8.4% mostly due to lower domestic sales as well as slower demand for flexible packaging products. That said, its profit before taxation margin was up slightly (+0.4 point [ppt]) on a better product mix, while the lower effective tax rate (-2.1ppts) minimised the bottom-line impact as CNP only declined by 3.5%. Quarter-on-quarter top line was down by 1.4% on a lower contribution from domestic sales, while the higher effective tax rate of 16.7% (versus 8.7%) caused CNP to decline by 14.1%.

We expect capital expenditure allocation of RM10 million each year in FY19 and FY20, with the group remaining in a strong net cash position. FY19-20E capital expenditure is slated for capacity expansion and funded by internal funds. SLP Resources Bhd plans to increase its capacity gradually up to 38,000 tonnes (+23%) by FY21, and we expect average utilisation rates of 60-70%.

 We make no changes to FY19-20E CNP of RM24-25 million, increase FY19-20E dividends to 5.3-5.6 sen (from 4.5-4.8 sen) on a higher dividend payout ratio of 70% (from 60%) which is closer to the current 9MFY19 payout level of 73%, while the financial year 2018 assumption (FY18A) dividend payout ratio was 56%. This implies a 4.2-4.5% yield for FY19-20.

We make no changes to our valuations which are on an unchanged target price-earnings ratio (PER) of 18 times based on a four-year historical average on FY20E earnings per share (EPS) of 7.9 sen. However, we believe our call to upgrade is warranted at the current levels, as the share price has retraced from its YTD high of RM1.41 in recent weeks (-12%) while results have met our expectations, and we expect the group to continue improving its product mix and utilisation going forward. We continue to like SLP Resources as it commands premium margins (about 15% earnings before interest and taxes) versus other plastic packagers under our coverage of 5-6% (save for Tomypak Holdings Bhd) which are valued at -1 standard deviation (SD) PER and -2 SD price-to-book value valuations.

The risks to our call include: i) lower-than-expected resin cost; ii) weaker product demand from Japan (25-30% of sales); iii) foreign currency risk from a strengthening ringgit; and iv) new entrants/competition biting into its market share. — Kenanga Research, Nov 11