KEY INVESTMENT HIGHLIGHTS'

• 2QFY21 bottom-line came in above our expectation

• Manufacturing division saw negative growth due to lower export sales

• PBT of trading division impacted by higher cost of copper pipes

• An interim dividend of 1.15sen was announced

• Maintain NEUTRAL with a revised target price of RM1.03

Above expectation. Superlon Holdings Berhad registered 2QFY21 core net profit (CNP) of RM2.35m (-13.3%yoy) which was above our expectation. The decline in CNP was on the back of reduction in revenue contribution from the manufacturing division. It is worth noting that the contraction of the Group’s top-line was cushioned by (1) improved gross profit margin, (2) lower selling and distribution expenses, and (3) lower administration expenses offsetting by higher net exchange loss.

Manufacturing division saw negative growth. Due to lower exports sales, the Group’s manufacturing division recorded a -23.3%yoy drop in revenue to RM18.4m in 2QFY20 compared to 24.0m in 2QFY20. The factors that steered down the export sales were (1) slowdown in demand in key markets, and (2) logistic challenges arising from restrictions implemented by various countries during the COVID-19 pandemic. Its PBT, on the other hand, recorded smaller contraction of -4.9%yoy to RM3.4m and the reduction in sales was compensated by an improvement in gross margin. The improvement was attributable to the (1) lower cost of material, and (2) lower manpower cost in production.

PBT of trading division impacted by higher cost of copper pipes. The top-line for trading division was up by 2.4% to RM4.2m largely due to higher sales of copper pipes to local customers. Nonetheless, its PBT was down by -4.7% to RM0.14m in 2QFY21 compared to RM0.15m in 2QFY22 primarily due to lower margin.

Dividend. A dividend of 1.15sen was announced by Superlon and is payable on 25 January 2021. Together with an earlier paid interim dividend of 0.75sen per share, the total declared dividend for FY21 amount to 1.9sen per share.

Revised earnings. Earnings for FY21F and FY22F revised to RM10.84m and RM13.22m respectively in view of (1) the better than expected result, (2) lower cost of material, (3) lower manpower cost in production, and (4) higher sales of copper pipes. The table below summarizes our latest net profit estimates for Superlon.

Maintain NEUTRAL with a revised target price of RM1.03 (previously RM0.77). We derive our target price by pegging a PER of 12.4x to its revised FY22EPS of 8.32sen per share. Considering a challenging quarter (due to CMCO restrictions and COVID-19 pandemic), we think that the Group has managed to maintain a healthy balance sheet. While we continue to remain cautious on the 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. Going ahead, we foresee better earnings growth from Superlon underpinned by (1) low raw material costs, (2) better operation from Vietnam factory, (3) recovery in Malaysia’s economic condition, and (4) more relax pandemic restrictions which will ease operations and supply chain resumption. All factors considered, we maintain our NEUTRAL recommendation on Superlon with adjusted TP of RM1.03 (previously RM0.77)

Source: MIDF Research - 21 Dec 2020