SLP’s net margin to improve in 2H18 on higher production capacity
KOTA KINABALU: SLP Resources Bhd’s (SLP) net margin is expected to improve in the second half of 2018 (2H18), driven by higher production capacity and the rollout of higher margin products, analysts say.
In a report, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) said, “SLP plans to increase capacity up to 38,000 MT (an increase of 58 per cent) by the financial year 2019 (FY19).
“We expect net margin to improve in 2H18 from rollout of higher margin products on an average resin cost of US$1,250 per MT in FY18 to FY19.”
Meanwhile, it noted that SLP’s first quarter of 2018 (1Q18) core net profit of RM5.2 million came within expectations.
It noted that quarter-on-quarter (q-o-q), SLP’s top-line was down by two per cent on a weaker US dollar which drives export sales.
“As a result, profit before tax (PBT) declined by 9.3 per cent on the back of slightly lower PBT margin (down 1.2 percentage point).
“However, core net profit increased (7.7 per cent) on a lower effective tax rate of 17.8 per cent (compared with 31.1 per cent in 4Q17),” it added.
On a year-on-year (y-o-y) basis, it said that SLP’s top-line was down by 3.9 per cent due to similar reasons as its q-o-q performance, and despite higher sales volume.
“This translated to slightly lower PBT margins (down 0.6ppt) on the back of lower operating profit (down 8.1 per cent).
“Nevertheless, CNP increased by 12.5 per cent on lower effective tax rates and after excluding a RM0.5 million unrealised gain on derivatives,” the research team said.
All in, Kenanga Research expected SLP’s capital expenditure (capex) allocation of RM13 million to RM15 million in FY18 to FY19 with the group remaining in a net cash position.
“FY18 to FY19E capex will be for capacity expansion as well as the new storage warehouse, and will be funded by share placement and internal funds,” it added.
The research team maintained its forecast of SLP’s FY18 to FY19E CNP of RM26 million to RM30 million.
“We maintain our earnings estimates for now as we expect stronger quarters in coming months from increasing capacity as we target 32,000 to 38,000 MT in FY18 to FY19 (compared with 24,000 MT in FY17A).
“Additionally, we expect a lower effective tax rate of 15.6 per cent in FY18 (compared with 17.8 per cent currently) from reinvestment allowances,” it added.
Kenanga Research upgraded its call of SLP to ‘outperform’.