INVESTMENT HIGHLIGHTS

• Plans to strengthen presence in IndoChina

• New warehouse could lead to better sales

• Proposed share split of 1 to 2

• FY17 expected to be another record year

• Maintain BUY with a higher TP of RM3.64 (ex-TP RM1.82)

Plans to strengthen presence in IndoChina. Superlon has set up a wholly-owned Vietnamese subsidiary recently. It plans to strengthen its presence in Vietnam and also to use it as a base to penetrate into other IndoChina markets. The move is commendable as Vietnam is already one of its top three markets and having a more significant presence there could further boost customers’ confidence, provide better after sales service as well as adopt to change in demand more quickly.

New warehouse could lead to better sales. The company is able further boost its production capacity through the new warehouse which is now completed through optimizing its layout plan. We estimate that the company may further boost output by another 10% to 20% once the new plan is carried out. The shorter lead time to serve customers from the additional floor space could also lead to higher sales.

Proposed share split of 1 to 2. Superlon Holdings Bhd’s (Superlon) has announced this corporate exercise, which is one of the very few since its listing since 2007. The exercise is expected to be completed by December. Its share base will be enlarged to 160 million shares from the 80 million shares currently. This should improve its share liquidity in the market. Upon completion of the exercise, our ex-TP will be adjusted to RM1.82 accordingly.

FY17 expected to be another record year. We expect Superlon to record higher earnings this year compared to FY16 based on the performance of its first nine months. That will chart a continuous growth for five years. We expect FY18 to be a positive year as the company reaps fruits from its new warehouse and market expansion plans. We also expect Superlon to remain in net cash position as RM9.8m for the new warehouse has been capitalized

Maintain BUY with a higher TP of RM3.64 (from RM3.36, ex-TP RM1.82). The new TP is based on a higher 13x price-to-earnings (previously 12x) of unchanged FY18F EPS, which is estimated at 28 sen. We reckon that Superlon deserves an a higher valuation due to its earnings growth, net cash position, ROE of 17% and dividend yield at 3.4% (higher than the small cap index’s 2.6%). Hence, we maintain our BUY recommendation.

Source: MIDF Research - 10 Apr 2017