Superlon seen expanding market, product mix

This article first appeared in The Edge Financial Daily, on September 30, 2019.
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Superlon Holdings Bhd
(Sept 27, 90 sen)
Maintain neutral with a lower target price (TP) of 97 sen:
Superlon Holdings Bhd’s first quarter of financial year 2020 (1QFY20) core net profit of RM2.5 million missed our expectations as it only made up 19.6% of our full-year estimate. An interim dividend of 0.75 sen was announced. The negative deviation can be attributed to raw material prices that stay elevated and competitive selling prices. Notably, its gross profit margin came in at 25.9%, compared with 30.4% a year ago.

 
Earnings fell 9.5% year-on-year (y-o-y) to RM2.5 million, even though revenue jumped 9.7% y-o-y to RM28.2 million. The increase in revenue can be seen in both the manufacturing and trading segments at 8.9% to RM24.5 million and 18.8% to RM3.8 million respectively. Profit before tax, however, fell by 15.4% to RM3.3 million and 15.4% to RM110,000 for both the manufacturing and trading divisions respectively due to high raw material prices. The lower year-on-year profit can also be attributed to an absence of foreign exchange gains.

We think that selling prices may remain competitive in the near term, while raw material prices could stay at elevated levels. That said, we believe that Superlon’s volume has increased, and it may continue to expand its market and further expand its product offerings to garner better margins in the future. That said, these initiatives may take time to translate into earnings growth. Hence, we revise our earnings forecasts for FY20 and FY21 by -7% and -3% respectively in view of a prolonged competitive pricing landscape.

In view of the ongoing pricing competition and elevated raw material prices, we maintain our “neutral” recommendation on Superlon. Our new TP of 97 sen is derived from an unchanged price-earnings ratio of 13 times based on forecast FY20 earnings per share of 7.44 sen which has been revised to reflect the change in our earnings forecasts. Potential catalysts for the stock include lower raw material cost and improving selling prices. Its dividend yield is expected to be 3.8%. — MIDF Research, Sept 27