Thoughts on Investing and Trading

My Thoughts on Superlon Holdings Berhad

ajim102
Publish date: Sun, 24 Sep 2017, 06:39 AM
ajim102
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Serve as a journal for me to share my thoughts on investing and trading
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Superlon Holdings Berhad is Malaysia's leading manufacturer of high quality thermal insulation materials used mainly in the Heating, Ventilation, Air Conditioning and Refrigeration (HVAC&R) system of residential, commercial and industrial buildings. The company’s thermal insulation products are used as vapor barrier for the prevention of condensation or frost formation on cooling systems, chilled water and refrigeration lines and heat loss reduction for hot water plumbing, heating and dual temperature piping (Annual Report)
 
Super Holdings Berhad just announced its latest Annual Report for Financial year 30 April 2017 in August with revenue and net profit increased by about 17.5% and 43.2% to 106.3m and 23.7m respectively. Net profit margin remains very high at about 22%. I have plot the growth net profit for Superlon Holdings Berhad for a better view on its performance.
 
 
Figure 1: Growth in Net Profit
 
 
 
 
Growth in net profit begins to improve exponentially from 2013 after management move out from its loss making business of Steel Pipes manufacturing and focus on its core business. Profit growth from 2008 to 2017 recorded a compounded annual growth rate (CAGR) of 13% which is good but if we calculate from 2013 to 2017 its CAGR is at staggering 42.74% and all of this growth is organic which means it comes from the business itself not from M&A, one-off gains or any other extraordinary income.
 
 
Figure 2 : Gross Profit Margin
 
 
 
Figure 3 : Net Profit vs ROE
 
 
 
Figure 2 shows the trend in Revenue to Cost of Sales to Gross Profit which we can see an exponential increase in its Gross Profit Margin especially if we observe from 2012 to 2017 (16% to 41%) a threefold increase in Gross Profit Margin which derives its value from high growth in revenue while keeping the cost under control. For me this is a sign of a quality growth company with efficient business operation in place.
 
The same can be observed for its Net Profit margin and Return On Equity increasing in tandem with the revenue and Gross Profit Margin's growth from its lowest point of -1.06% Return on Equity in FY2012 to 21.96% Return on Equity in FY2017, far exceed any return on fixed income or safer investment vehichles. This spectular growth with achieved with no debt and even better it keeps generating a healthy amount of cash flow to fuel the growth.
 
 
 
"Never take your eyes off the cash flow because it's the life blood of business"
Richard Branson
 
 
Looking solely at a company's profit growth does'nt tell its quality if the company fails to generate cash from its business especially free cash flow which the company can then use for busniess expansion, buying back shares or distributing dividends
 
 
Table 1 : Cash Flow of Superlon
 
  2,013 2,014 2,015 2,016 2,017 Average
Net Profit 4,001,613 5,850,480 9,380,590 16,660,089 23,714,774 11,921,509
CFFO 9,393,602 10,516,133 11,525,241 25,131,142 16,224,959 14,558,215
Capex 494,714 3,140,327 2,932,470 5,382,982 12,346,997 4,859,498
FCF 8,898,888 7,375,806 8,592,771 19,748,160 3,877,962 9,698,717
FCF/Profit 222% 126% 92% 119% 16% 115%

 

Table 1 above shows that Superlon Holdings Berhad is a cash generating company with an impressive 5-year FCF/Profit averaging to 115%,more than its net profit. FY 2017 FCF/Profit is the lowest among the 5-year (16%) due to high Capex spending for the new warehouse and its coming factory in Vietnam. It confirms the quality of the spectacular growth shown in Figure 1-3 above.

 

Valuation of Superlon Holdings Berhad using Free Cash Flow

 

At current price of 2.83 as at 21th September 2017,is Superlon still cheap and worth to invest in? 

 

"Price is what yo pay value is what you get"

Warren Buffet

"The value of a stock is worth all of the future cash flows expected to be generated by the firm, discounted by an appropriate risk-adjusted rate"

John Burr Williams

 

Using the average FCF from 2012 to 2017 of 9.6m, assuming growth rate of 20% for the first 5 years, 15% the next 5 years and a 5% untill forever(terminal value).Discount rate of 10% as it has a reasonable healthy balance sheet, the FCF attributed to common shareholders is RM3.39 per share. This represents margin of safety of 17% investing in Superlon Holdings Berhad at RM2.83 at the close on 21th September 2017. Notice that i make a pretty consevative assumptions on the growth rate of 20% compared to the company's recorded net profit CAGR of 42.74% to minimise the impact if my assumptions turn out to be wrong “Heads, I win; tails, I don’t lose much.”

 

With an excellent management team that has a proven track record over the years where they was able to turn around a loss making company to an excellent company in 5 years , Superlon Holding Berhad is in my opinion an investment that can give its investor a good night sleep.

 

 

Disclaimer : This article is only for sharing purpose . It is not a buy or a sell call. Please do your own analysis before buying or selling

 

 

 

 

SUPERLN (7235)
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Discussions
1 person likes this. Showing 10 of 10 comments

ongkkh

Your writting style similar to KCChong sifu....

2017-09-24 10:42

RainT

Already up so much

Now only come out hoo ha hoo ha

2017-09-24 11:51

ajim102

ongkkh, i am one of KCChong sifu's online course student thus im very much influenced by him plus i find that his writing style is very organize and neat.

2017-09-24 16:46

ongkkh

2.83 now

2017-09-24 20:18

ajim102

RainT Already up so much

Now only come out hoo ha hoo ha

Last i check there are no rules saying that we cannot do a write up for a company thats already up so much.

And how much up is so much?100% increase?200%?500%? The most important thing is to know the value of a company and pay a lot less. The DCF valuation shows that a current price of 2.83 there is still a margin of safety in Superlon's valuation. But in the end,every analysis or valuation is just an opinion and assumptions based on the writer's point of view. Its not meant to fit with everyone's view.

The stock market is ultimately a game of probability. Whether one speculate,trade or invest and in this game of probability one must always keep risk under control. As far return is concern,u can get 100%,200% or any other percentage that you can imagine.But if one ignores risk (intrinsic value,margin of safety,business quality etc) he will surely lose in the long run

2017-09-24 21:42

ajim102

Thank you ongkkh.i wanted to edit the comment but end up deleting it.i posted it back with the current price edited.cheers

2017-09-24 21:44

lkoky

is easy to use excel to extrapolate future income n earning to justify the high prices u pay now.

2017-09-27 07:55

Ricky Yeo

FYI. 20% growth rate is not pretty conservative. It is ultra aggressive.

2017-09-27 14:28

ajim102

lkoky is easy to use excel to extrapolate future income n earning to justify the high prices u pay now.
27/09/2017 07:55

I agree with your statement. In the end assumptions is still assumptions no matter what number we put in. But we must based our assumption on a good reason. and in the case of Superlon is its record to produce healthy cash flows

2017-09-27 16:19

ajim102

Ricky Yeo FYI. 20% growth rate is not pretty conservative. It is ultra aggressive.
27/09/2017 14:28

Thank you for your feedback.First of all i would like to say that im a fan of your work Ricky Yoe. I find all of your posts informative and full of value.

I admit that 20% growth rate is on the high side of the assumption. I should have have made a range of valuation with different growth rates.so here goes:

First 5-years Next 5-years Terminal years IV
20% 15% 5% 3.39
15% 10% 5% 2.32
10% 8% 5% 1.75

"Its better to be roughly right than precisely wrong"
John Maynard Keynes

Looking at today's closing price of RM2.32 i would say that it is fully valued now and further drop in price is an opportunity to get the stock at a wider Margin of Safety. The profit drop in its recent quarter report doesnt really change my views of superlon due to

1.My analysis is based year-on-year basis not on quarterly or daily basis
2.The company's fundamental is still intact(clean balance sheet,strong brand recognition,good management team)
3.The construction of new plant in Ho Chi Minh City to expand its manufacturing capacity which in my opinion is an excellent business decision as Vietnam is the largest contributer of export revenue for Superlon.

I like to think Superlon as an Antifragile company.Nassim Nicholas Taleb describe Antifragile as Things that gain from disorder. An antifragile entity will becomes stronger,better,improved when it is faced with difficulty. Superlon had already proven its antifragilitiness when it manage to comeback from a loss making company in 2012 to what it is right now and i dont think that the company had lost its antifragility just by looking at the latest quarter result.

2017-09-27 18:41

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