INVESTMENT MERIT

· A leading insulator manufacturer, SUPERLN manufactures and trades OEM thermal insulators of nitrile butadiene rubber (NBR) foam material, primarily for industrial applications. The export-oriented company also manufactures and trades NBR fitness mats as well as tools and equipment for heating, ventilation, and air conditioning (HVAC) purposes.

· Production cost factors. With NBR being a form of synthetic rubber, SUPERLN did not benefit from the decline in latex prices in 2015. However, the company is a USD beneficiary as its clientele mainly consists of foreign distributors, stretching to approximately 50 countries outside Malaysia. Based on management guidance, an estimate of 70% of total sales is conducted in USD. However, the net benefit is partially offset by imported raw material costs, which consist of approximately 55% of production cost. We note that SUPERLN does not entirely hedge its foreign currency transactions, which may expose the company to exchange rate fluctuations more quickly. However, we believe the impact of this risk is considerably neutralised as imported raw material costs are unlikely to overrun sales prices.

· SUPERLN sales grew 20.6% YoY in FY15 to RM74.5m, as the company was able to tap into higher foreign sales volumes, which are mostly in USD. Comparatively, FY13 and FY14 recorded sales YoY growth by 5.4% and 4.9%, respectively. On the gross profit (GP) perspective, FY13 and FY14 recorded RM13.0m (+49.9% YoY) and RM18.7m (+43.5% YoY) GP, which yielded 22.1% and 30.2% GP margin respectively. FY15's GP grew to RM23.9m (+28.1%) and at a better GP margin of 32.1%. FY13 saw net profit (NP) to close at RM4.2m (+242.5% YoY) with 7.2% NPM and FY14 NP at RM5.9m (+37.7% YoY) with 9.5% NPM. A strong margin expansion was experienced in FY15 as NP was recorded at RM9.4m (+60.3% YoY) with 12.6% NPM.

· FY16 is projected to be the most profitable year yet, as the last reported 1H16 results generated RM44.5m topline revenue and RM8.7m NP. These results consist of 60.0% of FY15’s RM74.5m revenue and 92.5% of RM9.4m NP. Management guided that the company has implemented initiatives to streamline operations of its production plants to be more efficient and to expand its production output. We expect the company to benefit with better margins given the more streamlined processes and with exchange rates currently favouring the company’s top line sales. All matters considered, we forecast FY16E to yield revenue of RM93.7m (+25.7% YoY), GP of RM33.8m (+41.4% YoY) and NP of RM14.5m (+54.7% YoY). As for our FY17E results, a revenue of RM103.0m (+10.0% YoY) is expected to be generated with a GP and NP of RM36.6m (+8.3% YoY) and RM19.6m (+6.8% YoY), respectively. ·

Potential dividend stock. While SUPERLN has yet to implement a minimum dividend pay-out policy, the company was able to contribute a 51% profit pay-out for dividend in FY15, leading to a 6.0 sen dividend at a 3.2% dividend yield, due to its strong performance. We are confident that the company is able to keep up with this profit pay-out rate going forward if it is able to continuously generate improving sales. Based on our estimates, we project that shareholders could be rewarded with 9.0 sen dividend at 5.1% dividend yield in both FY16E and FY17E.

· Trading buy with a fair value of RM2.03, ascribing at PER of 10.4x, with our FYE17 EPS of 19.5 sen. We believe this valuation is fair given that the stock has been trading consistently at the ascribed PER, which is also closely in line with the average PER of its small cap OEM peers. SUPERLN makes for an attractive stock for its: (i) strong growth prospects (+54.7% and +6.8% NP growth in FY16E and FY17E); (ii) sustainable profit margins (15.5% and 15.1% NP margin for FY16E and FY17E against a 9.8% average NP margin between FY13 to FY15); and (iii) decent dividend yield.

Source: Kenanga Research - 11 Feb 2016