INVESTMENT HIGHLIGHTS

• 1QFY19 results missed forecast

• Profit for the quarter fell by -19.5% yoy to RM2.85m

• Sequentially, profit more than doubled as profit margin rebounded

• FY19F/FY20F earnings estimate revised by -22%/-20%

• Maintain NEUTRAL with lower TP of RM1.23 (from RM1.58 previously)

1QFY19 results missed forecast as net profit of RM2.85m made up only 15% of our full year forecast. Revenue of RM25.72m was largely within expectations making up 22% of our full year estimates. The variance was attributed to lower than expected selling prices, resulting in lower gross profits. An interim dividend of 0.75 sen for FY19 was announced.

Profit for the quarter fell by -19.5% yoy to RM2.85m while revenue fell by 2.3%yoy to RM25.7m. The lower profit is largely due to competitive pricing that led to lower profitability. Notably, its core EBIT margin has been compressed by -3.4ppt to 14.4% from 17.8% a year ago.

Sequentially, profit more than doubled as profit margin rebounded. Compared to 4QFY18, the net profit of RM2.85m is a vast improvement compared to the RM1.38m qoq. Its core EBIT margin has improved from 4.74% previously to 14.38% while revenue improved marginally by 1.4% from higher manufacturing and trading divisions. The improvement are supported by the favourable exchange rates as well as better operating efficiency.

FY19F/FY20F earnings estimate revised by -22%/-20% as Superlon is unable to fully pass on the increase in raw material prices especially to its price sensitive customers. As a result, our estimate for FY19F/FY20F net profit is cut to RM15.0m/RM18.3m respectively. We have also cut our DPS assumption for both years to 3.5 sen from 5.5sen previously.

Maintain NEUTRAL with adjusted TP of RM1.23 (from RM1.58 previously). The lower TP is a result of lower EPS estimate for FY19. Our valuation method of 13x PE is unchanged. We cautious of the heightened competition globally while raw material prices remain elevated. On the flip side, its Vietnam factory is on track for production by end FY19 while it is still sitting on a net cash of RM9.2m.

Source: MIDF Research - 19 Sept 2018