KEY INVESTMENT HIGHLIGHTS

• 1QFY21 core net profit came in above our expectation

• Manufacturing division’s lower cost of material and production compensates decline in revenue

• Trading division’s PBT increased to RM0.2m, supported by increase in copper pipes sales

• An interim dividend of 0.75sen was announced

• Maintain NEUTRAL with a revised target price of RM0.77

Above expectation. Superlon Holdings Berhad recorded its 1QFY21 core net profit (CNP) at RM3.69m, a +46.8%yoy increase from the prior corresponding quarter of RM2.52m, which came in above our expectation. The increase in CNP was mainly attributable to lower costs of material and production as well as reduction in sales and distribution (S&D) expenses, offsetting the lower revenue registered by its manufacturing division.

Manufacturing division’s lower cost of material and production compensates decline in revenue. Due to lower exports and domestic sales, the group’s manufacturing division recorded a drop in revenue by -10.1%yoy to RM22.0m in 1QFY20. Its PBT, however, increased by +40.2%yoy to RM4.6m primarily due to lower cost of material and production coupled with favourable exchange rate movement as well as improved operation result from the group’s Vietnam factory. To note, while the operations of the group’s three Malaysian factories were temporarily halted in compliance with the MCO, the group was able to continue production in its factory in Binh Duong, Vietnam.

Trading division’s PBT increased to RM0.2m, as compared to RM0.1m during 1QFY20. This was in line with increase in revenue from RM3.8m to RM5.4m this quarter. The higher revenue recorded was as a result of an increase in copper pipes sales to the group’s local customers.

Dividend. A dividend of 0.75sen was announced by the group, accounting for 25% of our full-year estimate.

Earnings for FY21F and FY22F revised to RM10.1m and RM12.5m respectively in view of the better than expected result which was largely on the back of lower cost of sales and lower S&D expenses. While we continue to remain cautious on the group’s average selling prices (ASP) and demand for its insulation products, we opine that Superlon should be able to overcome any short-term headwinds premised on its lower cost of material and production as well as its strong balance sheet with net cash of RM8.0m. The group has also allocated RM9.6m for short-term investment.

Maintain NEUTRAL with a revised target price of RM0.77 (previously RM0.73). We derive our target price by pegging a PER of 12.2x (previously 13.0x) to its revised FY21EPS of 6.35sen per share. Catalysts for the stock include higher than expected recovery in volume and ASP and prolonged low raw material costs. Dividend yield is estimated at 4.0%.

Source: MIDF Research - 22 Sept 2020