INVESTMENT HIGHLIGHTS

• 1QFY18 profit below expectation due to surge in raw material prices

• 1QFY18 profit fell by 41.5% yoy to RM3.54m

• New market might boost second half results

• Vietnam expansion plan is on track

• Downgrade to Neutral with TP of RM2.36 based on FY19F EPS of 18.12 sen

1QFY18 profit below expectation due to surge in raw material prices. Superlon’s 1QFY18 came in below expectation, making up only 12.8% of our full year estimates. The main reason in the sharp drop in profit is the sudden increase in raw material prices. The company has announced a dividend of 1.5 sen, which is lower than 2.5 sen paid in the previous corresponding quarter.

1QFY18 profit fell by 41.5% to RM3.54m because of the surge in raw material prices. Raw material prices have since stabilised but it is estimated to be 25% to 30% higher yoy. Hence, we expect GP margin to remain under pressure for 2QFY18 but it might be a slight improvement compared to Q1. We anticipate for the management to implement cost cutting measures to improve its margins while they are also expected to start talks with customers to gradually revise selling prices going forward.

New market might boost second half results. Although first quarter results disappointed, we believe that its second half should improve with normalising GP margin and with the help of sales from a new market. We gather that Superlon is already close to entering this new market and targets to sell products with higher average selling prices to this market.

Vietnam expansion plan is on track. Superlon’s plan to start building a new factory in Vietnam is still intact. The plant is slated to start operations in the second half of FY19. We believe that funding of the new plant is still not an issue as the company is still sitting on a net cashpile of RM15.85m as of July 31st while the capex budgeted for the factory is RM17m.

Earnings revision. We cut our FY18F earnings estimates by 33% to RM18.5m due to the lacklustre results in 1QFY18. Subsequently, we also lower our DPS assumption from 6 sen to 4 sen. We reckon that the company will reserve some cash for the construction of its Vietnam plant.

Downgrade to Neutral with higher TP of RM2.36 (from RM2.26 previously). We downgrade the stock from Buy to Neutral due to the run up in share price since our previous report dated June 21st. However, we have increased our target price as we roll our base year from FY18F to FY19F. Our valuation method of 13x price-toearnings, which is 1 standard deviation above its 4 year P/E mean, is unchanged. As a result, we raise our TP to RM2.36, which is 13x price-to-earnings of FY19F EPS of 18.12 sen.

Source: MIDF Research - 27 Sept 2017