INVESTMENT HIGHLIGHTS

• Raw material costs stabilising

• To increase production capacity by 500 tonnes by FY18

• Trading division expected to grow in 2HFY18

• Studying the US markets

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

Raw material costs stabilising. High material costs was the main reason for Superlon’s lackluster 1HFY18. Looking ahead, raw material prices have averaged at lower levels of USD1,700 to USD2,000 per tonne from over USD3,000 previously (refer to Exhibit 1) so we expect Superlon’s gross profit margin to normalise to above 35% from 31.4% in 1HFY18. We also estimate that the high-price raw materials have been used up in 1HFY18 given the 37% drop in its inventories. Meanwhile, ringgit has strengthened over USD in 2QFY18 by 3.5% yoy, which dampens ASP slightly. However, we are not overly concerned as Superlon’s GP margin was at 39% in FY16A when USD/MYR rate was at 4.07.

To increase production capacity by 500 tonnes by FY18. Superlon has allocated RM5m to upgrade the equipment for its Malaysia plant, which is expected to boost production capacity by 500 tonnes before the end of FY18. Adding the new capacity from its Vietnam plant, total capacity for the group is expected to reach 10,500 tonnes p.a. by end of FY19, which is a 23% increase from the current level.

Trading division expected to grow in 2HFY18. Sales from insulation materials for 1HFY18 has improved by 12.3% yoy while the trading division saw a 133.8% jump from RM3.2m in 1HFY17 to RM7.5m in 1HFY18. We expect the trading division to register growth in 2HFY18 as the company has received Sirim certification for piping products, which has increased its customer base. PBT margin for the segment has also improved to 5.3% from 4.8% a year ago.

Studying the US markets. Superlon has received the required certification to penetrate the United States market. We expect the company to target states in the coastal areas with hot weather, which has high demand for airconditioning systems and demand for insulation products. While US is a big market, big insulator companies had set their foothold there. We believe that Superlon may be able to position itself there as a value for money alternative to its competitors’ products. Currently, it is identifying suitable distributors and working on market penetration strategies to suit the US market. We are long term positive on the development.

Maintain BUY with unchanged TP of RM2.36. We feel reaffirmed of the company’s prospects after the briefing as the management will continue to grow its production capacity and expand its markets. We make no changes to our earnings estimates and maintain our FY18F/FY19F EPS of 11.66sen/ 18.12sen respectively. Our valuation method of 13x PE (which is 1 standard deviation above its 4 year P/E mean) is unchanged.

Source: MIDF Research - 18 Dec 2017