We believe the 30% plunge in share prices from YTD high of RM1.41 to RM0.98 is overdone and grossly priced in the softer FY19 results due to higher raw material prices, unfavourable forex, coupled with higher installation and start up costs in the Vietnam factory. Despite the headwinds, management is cautiously optimistic on FY20 outlook given the commissioning of Vietnam plant, favourable USDMYR of 4.12 YTD (vs average 4.03 in 2018) and, stabilised NBR price. Valuation is undemanding at 12.3x FY20 P/E (16% lower than 10Y average of 14.6x), supported by 5sen net cash per share, strong 17% FY19-21 EPS CAGR and FY20-21 yields of 3.4-4.1%. Technically, the stock is grossly oversold and ripe for a LT downtrend line breakout amid bottoming up indicators.

Master in thermal insulation. Superlon is a leading nitrile butadiene rubber (NBR) thermal insulation manufacturer, which is primarily used for heating, ventilation, airconditioning and & refrigerator (HVACR) ductwork for residential, commercial and industrial buildings. Superlon is the domestic leader with over 55% market share and also a top 5 player in the world. Over 70% of its sales are exported to more than 70 countries worldwide. Its key markets are Asia (excluding Malaysia) & Oceania (~65% of total FY18 revenue) and Africa, America & Europe (8% of total FY18 revenue).

Positive outlook. According to Transparency Market Research, the global insulation market is expected to grow at a CAGR of 8% between 2013 and 2020 from USD37.8bn in 2013 to USD64.9bn as the industry rides on the increasing emphasis of energy efficiency and urbanisation, coupled with higher environmental awareness. Overall, Superlon’s products are major beneficiary of growing industrialization in emerging economies and global warming phenomenon. Volatile weather changes caused by the likes of El Niño and La Niña spurs demand for heating and cooling products, which drives growth for thermal insulation. Meanwhile, the better outlook for the construction industry in Malaysia should also have a positive effect on demand for HVACR solutions.

Vietnam’s expansion plan to cater for growth. Management expects the newly constructed warehouse (commissioned in 4QFY20) will provide growth avenues to scale up production capacity and efficiencies, and improve margin on higher automation. Strong pricing power and benign competitive environment allows Superlon to mitigate currency risks and volatility in raw material prices. Management expects economies of scale and on-going productivity gains to expand margins and provide bottom line growth with volume uptick, which is expected to spur FY19-21 earnings by 17% CAGR to RM14.2m from RM10.3m in FY19.

Acoustec could be the next pillar of growth in the long term. Superlon had introduced its new product, a type of insulator to insulate against noise, heat and vibration, which can be applied in cars and music studios among others. Management’s current focus is to penetrate into the after sales market for automotive specifically targeting the mass market cars. Malaysia will be the first market before it enters other ASEAN markets. We expect this new venture to contribute meaningfully to earnings post FY21 onwards.

Pending a LT downtrend line breakout. We believe Superlon is grossly oversold after sliding 30% from YTD high of RM1.41 (6 Mar) to RM0.98. The 4M sideways consolidation within RM0.93-1.16 levels should end soon as daily and weekly technical indicators are showing mild signs of bottoming up. Immediate resistances are RM1.01 (50D SMA) followed by RM1.08 (LT downtrend line from all-time high of RM2.96 in Aug 2017). A successful breakout will lift share price to our LT objective at RM1.16 (200D SMA). Key supports are RM0.96 (daily lower Bollinger) and RM0.93 (52week low). Cut loss at RM0.91.

Source: Hong Leong Investment Bank Research - 9 Jul 2019