Investment Highlights

• 1HFY18 results in-line

• 6MFY18 profit fell by 44.6% yoy to RM7.12m

• 2QFY18 profit improved by 2.5% to RM3.6m qoq

• Upgrade to Buy with TP of RM2.36 based on FY19F EPS of 18.12 sen

1HFY18 results in-line. Superlon Holding Bhd’s 1HFY18 earnings came in within our expectations, making up 39% of our full year forecast as we expect a stronger 2HFY18. Revenue is also within expectation, making up 48% of our full year estimate. A dividend of 1.0 sen was declared, bringing ytd dividend to 2.5 sen, which also met our expectation.

Profit for 6MFY18 fell by 44.6% yoy to RM7.12m mainly due to the high prices of raw material inventories which was spilled over from the previous quarter. We expect Superlon’s EBIT margin to rebound in the next quarter as the company generally does not keep raw material inventories for more than 6 months. Moreover, its inventories have come down by 37% to RM12.4m from RM19.8m in the previous quarter. We noticed that administrative expenses are lower marginally but is offset by higher distribution costs.

2QFY18 profit improved by 2.5% to RM3.6m qoq. A slight improvement is seen for its 2QFY18 earnings aided by revenue which rose 16% qoq, partly attributed to the high selling prices of copper pipes under its trading division.

Expansion plans still in progress. Superlon is currently expanding its production capacity through the setup of its Vietnam plant as well as expanding its markets and product mix. The construction of the Vietnam plant is on track for commercial production by FY19. Meanwhile, the expansion to new market may take a longer time to see meaningful earnings impact.

Upgrade to BUY (from NEUTRAL) with unchanged TP of RM2.36. We upgrade the stock to BUY from NEUTRAL due to the correction in Superlon’s share price since end-September. The company’s growth is expected to be driven by the demand for insulating products as well as heating, ventilation and air-conditioning parts. In FY19, we expect the new plant in Vietnam and Superlon’s market expansion plans to drive growth. It also has a net cash of RM21m. Our valuation method of 13x PE (which is 1 standard deviation above its 4 year P/E mean) is unchanged.

Source: MIDF Research - 15 Dec 2017