KEY INVESTMENT HIGHLIGHTS

• To recap, Superlon Holdings Berhad registered 1HY21 core net profit (CNP) of RM6.96m (-34.5%yoy).

• Virtual meeting with Superlon

• FY21 plans to strengthen the Group’s earnings

• Sanguine on Superlon’s prospect

• Upgrade to BUY with a unchanged target price of RM1.03

To recap, Superlon Holdings Berhad registered 1HY21 top-line of RM50.04m (-11.3%yoy). The decline in the headline 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.

We had a virtual meeting with Superlon yesterday and the aim of the meeting is to understand Superlon’s outlook and plans moving forward as well as briefing on 2QFY21 financial results. Further details on the group’s plan were shared during the virtual meeting yesterday with Superlon. Below are some of the key takeaways:

Vietnam factory anticipated to continue deliver good operating results. We note that Superlon has diverted some of its order to Vietnam factory as at end of April FY20. As for now, the Group is planning to continue to divert its order to Vietnam factory due to uncertainties on Movement Control Order (MCO) in Malaysia. The factory in Vietnam is also expected to have enough semi-finished raw material from Malaysia to cater the customers’ demand. It is also worth noting that Superlon will continue to enjoy low tax rate due to the tax holiday in Vietnam. Other than that, we also gather that the Group has bought more copper pipes around mid this year as they already anticipated the increase in copper price moving forward as a result, this will help to increase the Group’s profit margin.

FY21 future plans to strengthen the Group’s earnings. Superlon has came out with a few future plans in FY21 in order to strengthen its earnings and one of it is to invest in replacement, new machinery & R&D Lab. The Group has allocated RM10m for these initiatives and expected to increase in production capacity by +2,000 tonnes for insulation and +500 tonnes for acoustic. On top of that, Superlon planning to expand the product application (non-HVAC applications and expand acoustic) as well as non- insulation sales (copper pipes and HVAC related product).

Sanguine on Superlon’s prospect. As for the local market, the Group sees (1) the opportunity in partnering its distribution network to secure more project orders, (2) expand trading business segment, and (3) possible improvement in the property market. On the other hand, for the export market, the Group is expected increase in Foreign Direct Investment in ASEAN due to the expect shift in supply chain to ASEAN Countries.

Impact to earnings. We leave our earnings forecasts unchanged as the virtual meeting yielded no surprises.

Upgrade to BUY from NEUTRAL with unchanged target price of RM1.03. We derive our target price by pegging a PER of 12.4x to its revised FY22EPS of 8.32sen per share. 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. Moving forward, the Group is planning to leverage and expand its current product application in order to achieve better financial performance. Furthermore, the recent drop in its share price present an opportunity for investors to accumulate. As such, we upgrade the stock to BUY (from NEUTRAL). The unchanged TP of RM1.03 implies expected total return of +21.5%

Source: MIDF Research - 23 Dec 2020