KEY INVESTMENT HIGHLIGHTS

• 1QFY20 results missed estimate

• Earnings fell 9.5%yoy to RM2.5m

• Near-term outlook may remain subdue but volume has improved

• Maintain NEUTRAL with an adjusted TP of RM0.97 (previously RM1.04)

1QFY20 results missed estimate. Superlon’s 1QFY20 core net profit of RM2.5m missed our expectation as it only made up 19.6% of our full year estimate. An interim dividend of 0.75 sen was announced. The negative deviation can be attributed to raw material prices that stay elevated and competitive selling prices. Notably, its GP margin came in at 25.9% compared to 30.4% a year ago.

Earnings fell 9.5%yoy to RM2.5m even though revenue jumped 9.7%yoy to RM28.2m. The increase in revenue can be seen in both the manufacturing and trading segments at 8.9% to RM24.5m and 18.8% to RM3.8m respectively. PBT however fell by 15.4% to RM3.3m and 15.4% to RM0.11m for both the manufacturing and trading divisions respectively due to high raw material price. The lower on-year profit can also be attributed to the absence of foreign exchange gain.

Near-term outlook may remain subdue but volume has improved. We think that selling prices may remain competitive in the near-term while raw material prices could stay at elevated levels. That said, we believe that Superlon’s volume has increased and it may continue to expand its market and to further expand its product offerings that may garner better margin in the future. That said, these initiatives may take time to translate into earnings growth. Hence, we revise our earnings forecasts for FY20F and FY21F by -7.0% and -3.0% respectively in view of the prolonged competitive pricing landscape.

Maintain NEUTRAL with an adjusted TP of RM0.97 (previously RM1.04). In view of the on-going pricing competition and elevated raw material prices, we maintain our Neutral recommendation on Superlon. Our new TP of RM0.97 is derived from an unchanged PER of 13.0x, based on FY20F EPS of 7.44 sen which has been revised to reflect the change in our earnings forecast. Potential catalysts for the stock include lower raw material cost and improving selling prices. Dividend yield is expected at 3.8%.

Source: MIDF Research - 27 Sept 2019