We recommend to “Take Profit” on SUPERLN with an upgraded TP of RM2.30 on a higher targeted PER of 11.0x (vs. 10.4x previously). FY16 net earnings beat expectations by 8%, due to new clients from new regions and larger orders from existing clients. A new warehouse expected to be completed by Oct-Dec’16 will make way for better storage management and higher efficiency. FY17E/FY18E earnings forecasts are backed by an expected plant utilisation rate of c.85%.

FY16 outstanding performance exceeded our expectations, as revenue grew by 21.3% YoY on the back of larger orders from existing customers as well as fruits from the management’s effort to increase SUPERLN’s presence in previously untapped regions with limited competition, primarily in Africa. Additionally, the company enjoyed higher average selling prices (ASP) for most of the year thanks to stronger USD, which boosted gross profit margins to 39.0% (+6.9 pts YoY). The company yielded a net profit of RM16.7m (+77.6% YoY) which beat our estimate of RM15.5m by 8%.

Focus on capturing market share. Management guided that although strong USD rates benefited export ASPs, the company aims to enlarge its market share by pricing products more competitively. We believe this strategy is apt as it focuses more on improving the company’s operational capabilities rather than depending on favourable forex movements.

Operations streamlining on track. Recall that in our earlier report, the company implemented initiatives to streamline operations of its production plants to be more efficient and expand production capacity. In relation to this, management announced that the construction of a new warehouse is underway and expected to be completed by the end of this year. The warehouse will allow for more effective storage management and space savings from the existing plants. The new plant, we believe, could provide room for the group to enhance its operational efficiency moving forward.

Growth to remain sustainable? Though FY16 ended on a high note with 77.6% net profit growth, we expect FY17E to yield a lower net profit at RM15.7m (-6.0% YoY) on our assumptions that forex rates stabilises in the coming year. We introduce our FY18E figures with net earnings of RM17.4m (+10.8% YoY) attributed by the full-year impact of larger production capacity (in relation to the new warehouse) on the back of a higher utilisation rate of c.85% in FY17E and FY18E. The ascribed rate is higher than the historical utilisation rate of c.80% as we expect management to be more aggressive with its new strategy to take on larger market share and therefore requiring higher levels of output.

Dividend prospects remain attractive. FY16 saw a total dividend payment of 9.0 sen, which was within expectations. The dividend pay-out translates to c.45% distributed from FY16 net earnings. We anticipate future dividend pay-outs to range closer towards c.50% level, which is the historical high, generating dividend payments of 10.0 sen (4.5% yield) and 11.0 sen (5.0% yield) in FY17E and FY18E, respectively.

“Take Profit” with an upgraded TP of RM2.30 (vs. RM2.03 previously). We are ascribing a higher valuation for SUPERLN with a PER of 11.0x (from 10.4x) against the average FY17E/FY18E EPS of 20.9 sen. On our previous valuation which was derived from the stock’s historical average PER, we believe the positive rerating is fair given the stronger ROE commanded by SUPERLN in FY16 against its OEM peers. However, we are cautious with the premium ascribed as revenue growth potential is restricted by the company’s already high production plant utilisation rate. Given the limited upside potential against our revised TP, we recommend taking profit on the stock. The call also appears timely in lieu of the share price rally during the recent months where it lingered above our initial TP of RM2.03. However, we believe the stock still presents an opportunity for investors who are seeking for decent dividends, as the stock provides potential forward dividend yields of 4.5%-5.0%.

Source: Kenanga Research - 19 Jul 2016