• Record results exceeded expectations

• Highest volume sold alongside improved margins

• New plant in Vietnam starting FY19

• Formal dividend policy of 30% payout

• Maintain BUY with TP of RM2.26

Record results that exceeded expectations. Superlon’s FY17 net profit beat our forecast by 10%. Sales exceeded RM100m for the first time as it rose 17.5% yoy partly due to better than expected performance from the trading division. Meanwhile, net profit surged 42.4% to RM23.72m. The higher net profit is attributed to the higher volume and better margins. No dividend was declared for this quarter as full year DPS of 11 sen (pre-split) was announced in 3Q17.

Highest volume sold alongside improved margins. The company recorded the highest yearly and quarterly volume. Its gross profit margins improved further to 41.45% in FY17 compared to 39.04% in FY16. Net profit margin also climbed to 22.32% in FY17 from 18.43% a year ago. We believe there is still room for volume growth as the company has yet to fully utilise its new warehouse. We estimate that there is at least another 10% of room for capacity enhancement once the warehouse is fully utilised.

New plant in Vietnam starting FY19. The company announce that its new plant in Vietnam is slated for operational commencement in FY19. We are not surprise by this development as Vietnam has been an important market for the group. The plant will be built on a 2.47- acre land with capital expenditure for the plant budgeted at USD4m (RM17m). We believe that funding will not be an issue given the company’s strong operating cashflow and net cash position, which allows it to gear up.

Higher cashpile of RM32.39m. Superlon’s cash and cash equivalent has increased further to RM32.39m from RM30.40m a year ago. Net cash position is RM22.02m as the company borrowed some money to fund its expansion. The cash will come in handy for the company to fund its new plant in Vietnam at minimal financial costs as net cash exceeded the capital expenditure of RM17m estimated.

Formal dividend policy of 30% payout. The company has also announced a dividend policy of 30% net profit payout. Although the company has been paying out dividends in the past 5 years with payout ratios going up to 50%, we are positive with this announcement that formalises its commitment in creating shareholder value.

We increase our FY18F profit forecast by 24% accordingly as we take into consideration of higher volume sold and better profit margin. We also expect operating margin to improve further as a result of better economies of scale. We have also increased our DPS forecast from 5.5 sen to 6.0 sen.

Maintain BUY with a higher TP of RM2.26. We increase our TP to RM2.26 based on 13x price-to-earnings of FY18F EPS. We have increased our FY18F EPS forecast to 17.35 sen from 14 sen previously. We continue to like Superlon for its high cash position, superior profitability and capacity expansion plans.

Source: MIDF Research - 21 Jun 2017