Insulated growth

Amidst a sharp decline in insulation products ASP, Superlon 1HFY17 net profit still rose 28% yoy to RM11m on strong sales volume growth in domestic demand. Rising efficiencies from higher utilisation underpinned margin expansion, despite diminishing currency tailwinds. Newly-commissioned warehouse will boost production capacity by 30% in FY18, while upgrading works should cushion margin pressure in view of rising raw material prices.

Strong growth seen in 1HFY17

We attended Superlon’s analysts briefing following the release of 1HFY17 results. 1HFY17 revenue grew 8% yoy on higher sales volume underpinned by stronger growth in domestic insulation sales volume despite a significant reduction in ASP due to the diminishing currency tailwinds. 1HFY17 PAT rose 28% yoy on the back of firmer margin, despite the higher effective tax rate (+3ppts) due to lower deferred tax income recognized. Net margin expanded 4ppts yoy supported by predominantly higher efficiencies and economies of scale, while the reduction in raw material prices (synthetic rubber or nitrile butadiene) also boosted margins.

Production capacity expansion and rising efficiencies

As a follow-up to our previous non-rated note (see ‘Master in insulation’), management guided that the construction of the new warehouse costing RM10.3m has been completed barring some exterior works. The new warehouse is expected to be commissioned in 2HFY17, which will free up existing factory space and allow for the installation for more production lines. Superlon also plans to invest approximately RM5m to replace and upgrade existing machinery, which should uplift efficiencies and cushion margin pressure. All things considered, this should increase Superlon’s production capacity by 30% with better efficiencies and higher margins, while full-year impact is to be expected in FY18.

Attractive valuations with strong profitability profile

With rising production capacity, growing efficiencies and strong management track record, Superlon is poised to maintain its superior profitability profile with ROE of 19%. Effective tax rate is likely to trend lower given tax breaks for capital allowance, which should boost PAT margin in near-term. Superlon remains in a net cash position with cash balance of RM29m, or 15% of its total market capitalisation. Superlon trades at trailing 10x PER on a cash-adjusted basis, with a strong FCF generation to sustain dividend payout.

Source: Affin Hwang Research - 27 Dec 2016