This article first appeared in The Edge Financial Daily on June 22, 2017

Superlon Holdings Bhd
(June 21, RM2.03)
Maintain buy call with a higher target price of RM2.26: Superlon Holdings Bhd’s financial year 2017 (FY17) net profit beat our forecast by 10%. Sales exceeded RM100 million for the first time as it rose 17.5% year-on-year partly due to better-than-expected performance of the trading division.

Meanwhile, its net profit surged 42.4% to RM23.72 million. The higher net profit was attributed to higher volume and better margins. No dividend was declared for this quarter as full-year dividend per share (DPS) of 11 sen (pre-split) was announced for the third quarter of FY17.

The company recorded the highest yearly and quarterly volumes. Its gross profit margins improved further to 41.45% in FY17 compared with 39.04% in FY16. The net profit margin also climbed to 22.32% in FY17 from 18.43% a year ago.

We believe there is still room for volume growth as the company has yet to fully utilise its new warehouse. We estimate that there is at least another 10% of room for capacity enhancement once the warehouse is fully utilised.

The company announced that its new plant in Vietnam is slated for operational commencement in FY19. We are not surprised by this development as Vietnam has been an important market for the group.

The plant will be built on a 2.47-acre (0.99ha) land with capital expenditure (capex) for the plant budgeted at US$4 million (RM17 million). We believe that funding will not be an issue given the company’s strong operating cash flow and net cash position, which allows it to gear up.

Superlon’s cash and cash equivalent have increased further to RM32.39 million from RM30.4 million a year ago. Its net cash position is RM22.02 million as the company has borrowed some money to fund its expansion.

The cash will come in handy for the company to fund its new plant in Vietnam at minimal financial costs as net cash exceeded the capex of RM17 million estimated.

The company has also announced a dividend policy of a 30% net profit payout. Although the company has been paying out dividends in the past five years with payout ratios going up to 50%, we are positive on this announcement that formalises its commitment in creating shareholder value.

We increase our FY18 profit forecast by 24% accordingly as we take into consideration the higher volume sold and better profit margin. We also expect the operating margin to improve further as a result of better economies of scale.

We have also increased our DPS forecast from 5.5 sen to six sen. We continue to like Superlon for its high cash position, superior profitability and capacity expansion plans. — MIDF Research, June 21