INVESTMENT HIGHLIGHTS

• FY19 results missed estimate

• FY19 core earnings fell 33%yoy to RM8.2m

• Competitive pricing may continue to dampen earnings in the near-term

• Maintain NEUTRAL with lower TP of RM1.04

FY19 results missed estimate as Superlon’s core net profit of RM9.9m made up only 88% of our full year forecast. The unfavourable deviation can be largely attributed to competitive pricing and undesirable product mix which resulted in lower ASP and profitability. Full year DPS was 3.05 sen, which is also below expectation.

FY19 core earnings fell 5.8%yoy to RM9.9m in tandem with revenue that slipped 3.4%yoy to RM105.7m. The lower profitability can be attributed to weakening pricing power due to intensified competitiveness. The lower profitability can also be attributed to the Vietnam factory which has just started operations at its early stage and has not reached optimal operational efficiency. That said, we expect the Vietnam plant operational efficiency to improve over time.

4QFY19 core earnings improved 69%yoy to RM1.55m as revenue increased by 8.1% to RM27.4m during the quarter. The better revenue can also be attributed to higher income from the trading division. However, core net profit fell 13.8%qoq mainly due to less desirable product mix that resulted in lower profitability.

Competitive pricing may continue to dampen earnings in the near-term. We notice that Superlon’s pricing power has weakened in the past few quarters due to intense competition which resulted in lower profit margins. On the other hand, its Vietnam plant operational efficiency is expected improve gradually. We understand that management is working hard to develop new products and new markets but these initiatives may take time to come to fruition. On a brighter note, USD/MYR exchange rate at above 4.0 is accommodative for its export business.

Earnings cut by -20.1% for FY20F and -12.9% for FY21F to RM12.7m and RM14.2m respectively as we revise our average selling prices.

Maintain NEUTRAL with a TP of RM1.04 (from RM1.32 previously). The lower TP is derived from 13.0x PER FY20F EPS of 8.0 sen following the downward revision in our earnings estimates. Nonetheless, potential catalysts for the stock include lower raw material prices, higher sales volume and better product mix. Balance sheet is still healthy with a net cash of RM1.4m while dividend yield is estimated at 3.5%.

Source: MIDF Research - 26 Jun 2019