This article first appeared in The Edge Financial Daily on June 25, 2018

Superlon Holdings Bhd
(June 22, RM1.24)
We downgrade to neutral with a revised target price (TP) of RM1.58 from RM1.82: Superlon Holdings Bhd’s earnings of RM12.3 million for the financial year ended April 30, 2018 (FY18), making up 80% of our full-year forecast.

The recovery in the second half of FY18 was weaker than expected.

This was due to higher-than-anticipated raw material costs and also from lower average selling prices.

An interim dividend of 0.75 sen for FY19 was announced. Its FY18 dividend per share of 3.5 sen was lower than the four sen we had expected for the year.

Profit for FY18 fell by 48.3% year-on-year (y-o-y) to RM12.3 million, mainly due to high prices of raw materials as well as a stronger ringgit y-o-y.

The company could not pass through the higher raw material costs to customers because of a competitive pricing landscape, which led to a compression in core earnings before interest and tax, which dropped by 8.58 percentage points to 17.2%.

Sequentially, fourth quarter of FY18 profit declined by 62.8% to RM1.4 million as sales declined by 6.6% quarter-on-quarter.

This was because of lower sales recorded for both manufacturing and trading segments.

We have revised our FY19 earnings estimate downwards by 13.1% as prices of raw materials remain elevated.

We also believe that it will be challenging to increase selling prices in the near term due to the more intense competition regionally.

As a result, our estimate of FY19 net profit is cut to RM19.3 million from RM22.2 million previously.

Superlon’s plan to set up its Vietnamese plant is going on as scheduled. The construction of the plant is on track for commercial production by the end of FY19.

We downgrade to “neutral” with an adjusted TP of RM1.58. The lower TP is a result of a lower earnings per share estimate for FY19.

Our valuation method of 13 times price-to-earnings is unchanged.

While we expect FY19 to be bettter than FY18, we are turning more cautious in view of the heightened competition globally.

Locally, we expect demand to recover following the conclusion of the general election. — MIDF Research, June 22