INVESTMENT HIGHLIGHTS

• Vietnam plant completed

• Acoustec could be a growth driver in the future

• Average selling prices and gross profit margin saw improvement

• Maintain BUY with unchanged TP of RM1.50

Vietnam plant completed. During the briefing, Superlon’s management had updated the progress of its Vietnam plant. The plant has been physically completed and was doing some trial runs. They had targeted commercial production by end of FY19, mainly to serve the local Vietnamese market and certain export markets. The new plant has a production capacity of 1,500 tonnes yearly, adding about 14% to the group’s overall production capacity. The management plans to hire about 60 staff for the plant. We expect positive contribution from this plant by end of FY19.

Acoustec could be a growth driver in the future. Superlon had introduced its new product, a type of insulator to insulate against noise, heat and vibration, which can be applied in cars and music studios among others. Management’s current focus is to penetrate into the after sales market for automotive specifically targeting the mass market cars. Malaysia will be the first market before it enters other ASEAN markets. Although we think that there is potential for volume pick up for this new product given its unique proposition, we think that it will take some time for it to contribute substantially to the group.

Average selling prices and gross profit margin saw improvement. Although volume has declined by 8.5% compared to 1QFY19, it is offset by average selling prices that had increased by 9.0%qoq. Gross profit margin has also improved from 30.3% in 1QFY19 to 35.5% in 2QFY19. We expect its profitability to improve further in 2HFY19 given the easing raw material prices and relatively stable foreign exchange rates.

Maintain BUY with unchanged TP of RM1.50, which is based on 13x PER FY20F EPS of 11.55 sen. Our positive view on the stock is reaffirmed following the briefing and we make no changes to our assumptions. Risks to our call include forex volatility, spike in raw material prices and slower than expected commercial production of its Vietnam plant. Superlon’s balance sheet is still healthy with a net cash of RM6.5m. Dividend yield is estimated at 2.8%.

Source: MIDF Research - 14 Dec 2018