This article first appeared in The Edge Malaysia Weekly on June 25, 2018 - July 1, 2018

THERE is a fine line between buying the dip and catching a falling knife. In the case of thermal insulator manufacturer Superlon Holdings Bhd, which saw its share price almost halve over the past nine months, investors would have got hurt catching this falling knife.

The share price of the Taiwanese family-owned company has plunged thrice — down from an all-time high of RM2.88 on Sept 18, 2017, to RM2.22 on Sept 28, then taking another dive to RM1.43 on Feb 15 this year, before sliding to a 52-week low of RM1.01 on April 4.

Year to date, the counter has declined 25.5%. It closed at RM1.52 last Thursday, giving the company a market capitalisation of RM241.4 million. The stock is currently trading at a price-earnings ratio of 14 times.

One obvious factor behind Superlon’s share price slump is the sharp decline in earnings in its financial year ended April 30, 2018 (FY2018).

Despite a higher revenue, the company earned only half as much in FY2018 as its net profit tumbled 48% year on year to RM12.2 million due mainly to an unfavourable foreign exchange rate and higher raw material prices. This is in sharp contrast to its record-breaking profit a year earlier that was driven mainly by sales volume growth, production capacity expansion and better margins.

Prior to FY2018, its revenue and profit had been on an upward trend for five years. From FY2013 to FY2017, it nearly doubled its top line from RM58.9 million to RM106.2 million while its bottom line grew almost sixfold from RM4.1 million to RM23.7 million. FY2017 marked the first time its revenue breached the RM100 million mark.

Superlon executive director Liu Han-Chao acknowledges that investors, including some fund managers, have expressed their concerns over the company’s recent financial results and share price performance. “They saw our weaker earnings and reacted, which is fair because nobody would have predicted that we would be hit badly by higher raw material prices. However, the short-term share price performance is not a big concern for us. We are still going forward as a company,” he tells The Edge in an interview.

The 36-year-old Australian adds that short-term volatility is inevitable for any company but maintains that Superlon’s fundamentals remain intact. “We hope that everybody could give us a little bit of time ... be patient with us [while we try] to get things to settle down.”

Superlon was co-founded by Liu’s mother, Jessica Lee Hsiu-Lin, a Taiwanese Australian. She is the group’s managing director and CEO with more than 34 years of experience in the rubber thermal insulation industry.

The mother-and-son team owns the lion’s share of the company — a collective 31.57%.

Based in Klang, Superlon produces 9,000 tonnes of thermal insulation material a year and is running at 80% capacity. The material is a major component of heating, ventilation, air conditioning and refrigeration systems for residential, commercial and industrial buildings.

Thermal insulation products are used to prevent condensation or frost formation in cooling systems and chilled water and refrigeration lines as well as to reduce heat loss in hot water plumbing and heating and dual temperature piping.

On why the company did not embark on a share buyback programme, Liu opines that it is “a defence mechanism rather than an active engagement”.

“Of course, we have the facility and mandate every year. We may do that one day but right now, we would rather focus on our business.”

It is worth noting that Superlon has a 55% to 60% share of the domestic rubber thermal insulation market. Its main rivals include Italian firm L’Isolante K-Flex SpA and local company Insulflex Corp Sdn Bhd.

Superlon, through its wholesalers and distributors, exports its products to more than 70 countries. About 70% of the group’s revenue is from these markets.

While the company practises natural hedging as it buys its raw materials in US dollars, Liu concedes that the strengthening of the ringgit will still affect its top line. “In the past few months, although our sales volume was good, our revenue in ringgit terms after conversion was not as good.”

Another headwind is the spike in the cost of raw materials, fuelled primarily by rising oil prices. Superlon’s thermal insulation products require nitrile, synthetic rubber and chemicals.

“Raw material prices have stabilised but are quite high at the moment. It looks like they could rise further because oil prices are high due to Opec (Organization of the Petroleum Exporting Countries) production cuts,” Liu explains.

He says Superlon may have to raise its average selling price (ASP) to protect its margin but this cannot be done too drastically. “Passing on the cost to customers is an option but we have to do it progressively at the right time. In fact, we have been doing that over the past 12 months but it could only partly offset the impact of the higher cost of raw materials.”

However, he says this is not easy to do as Superlon has customers in the low and high-price sectors. “We try to pass on the cost, ranging from 5% to 10%, to most of our customers. We need to take market acceptance into consideration.”

While most customers have agreed to the price increase, Liu says some are unhappy because Superlon’s competitors are not raising their prices.

“We want to know why and we want to learn from them. We will continue to find ways to improve the quality of our products,” he says.

Apart from increasing the ASP, the company is also looking for ways to reduce its production cost. “We are constantly developing new chemicals, trying to find a cheaper substitute, but this is not going to happen overnight,” says Liu.

Nobody knows where Superlon’s share price is headed but if investors are confident of its long-term prospects, this might be a bargain at current level.

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