INVESTMENT HIGHLIGHTS

• 6MFY19 results within expectation

• 6MFY19 net profit marginally lower at RM7.08m

• Profit for the quarter jumped 16.5%yoy to RM4.23m

• Lower raw material prices, new product and new plant to support growth

• Upgrade to BUY with higher TP of RM1.50 (from RM1.23 previously)

6MFY19 results within expectation as net profit of RM7.08m made up 47% of our full year forecast. An interim dividend of 1.15 sen was announced, bringing year-to-date (YTD) DPS to 1.9 sen, which is largely in-line with our forecast.

6MFY19 net profit marginally lower by -1.4%yoy to RM7.08m mainly due to sales that dipped by -7.2%yoy. The underwhelming 1QFY19 dragged down its YTD performance.

However, profit for 2QFY19 jumped 16.5%yoy to RM4.23m although revenue slid -18%yoy to RM25.05m. The lower sales recorded can be attributed to lower volume while the improvement in profit for the quarter is mainly due to favourable foreign exchange rate as well as lower raw material prices. Quarter-on-quarter, net profit soared 48.4% while revenue declined by 2.6%. GP margin has improved to 35.5% from 30.3% in the previous quarter.

Lower raw material prices, new plant and new product to support growth. Looking ahead, we expect Superlon’s outlook to improve as one of the main raw materials, butadiene, has seen a price drop of about 30% since the beginning of September. Due to the lag effect in supplier pricing, we expect the benefit of lower raw material price to have a greater positive impact for Superlon in 2HFY19. On top of that, Superlon’s Vietnam plant is on track and is expected to contribute positively to the group in 2HFY19. It has also launched a new product recently which could be another growth driver in FY20.

Upgrade to BUY from NEUTRAL with a higher TP of RM1.50 (from RM1.23 previously) as we roll over our base year to FY20. Our earnings forecast for FY18F and FY19F are unchanged while our valuation method of 13x PE remains. Catalysts for the stock include lower raw material prices, sales from its new product and higher volume contributed by its Vietnam plant. It is sitting on a net cash of RM6.5m and dividend yield is estimated at 2.8%.

Source: MIDF Research - 13 Dec 2018