Thursday 28 Mar 2024
By
main news image

This article first appeared in The Edge Financial Daily on July 13, 2017

Superlon Holdings Bhd
(July 12, RM2.27)
Rerate to trading buy with a fair value of RM2.50:
The recent financial year 2017 (FY17) results have surpassed expectations, thanks to effective cost savings and more efficient production methods. Going forward, we expect growth to be driven by the production commencement of Superlon Holdings Bhd’s new factory-cum-warehouse, and operations of its first overseas production plant in Vietnam in the first half of FY19 (1HFY19). It also recently announced a 30% dividend policy.

The latest FY17 results recorded revenue of RM106.3 million (up 18% year-on-year [y-o-y]) which was slightly above our estimate of RM99.9 million due to stronger sales on both domestic and export demand. The widely untapped African market continued to prove itself as the highest-growth region. 

Net profit for the year, however, was registered at RM23.7 million (up 42% y-o-y) which beat our expected RM15.7 million target. The higher earnings were realised as margins expanded from lower raw material prices as well as cost savings from product improvements and better economies of scale.

Management updated that the construction of the new warehouse-cum-factory is completed and pending final infrastructural approvals before commissioning. The new facility should boost the group’s production rate to about 9,000 tonnes per year (up 25% from about 7,200 tonnes per year) by end-FY18. 

However, as the surrounding layout of the facility allows for better storage management, this has allowed for more optimised allocation of space and production methods in the existing plants.

The group had recently announced plans to construct a new plant expected to commence production by FY19, with a production capacity of about 1,500 tonnes per year (up about 17% of total group capacity after the commissioning of the new facility). 

Vietnam is currently the largest importer of the group’s products and the factory would allow more efficient product delivery to its clients there, while also enabling better penetration in surrounding regions. 

We are upbeat about this plan as it should also allow for cost savings with lower export duties and delivery costs incurred. However, contributions from here may only be reflected in FY20.

While we had previously expressed concerns about limited growth prospects arising from potential overutilisation of production after the completion of the new factory, we were positively surprised at the results of the group’s emphasis on product research and development in recent quarters which not only reduced input costs while maintaining quality, but also allowed for more effective production methods. 

As the above-mentioned plans are expected to materialise in the near future, we believe the group is well positioned to reap the fruits of its efforts and could potentially see more vibrant results. Hence, we estimate net earnings for FY18/FY19 to record at RM27.8 million/RM30.7 million (up 17%/11% y-o-y).

We believe the positive rerating is justified, driven by its improving operational capabilities and efforts to expand its export outreach. Further, the recent 1:2 share split has boosted liquidity and allows for more active shareholder participation.

Risks to our call include delays in commencement of new plant operations and a significant increase in raw material costs. — Kenanga Research, July 12
 

      Print
      Text Size
      Share