This article first appeared in The Edge Financial Daily on October 14, 2019

KUALA LUMPUR: Thermal insulation material maker Superlon Holdings Bhd is eyeing more businesses from a new Australian customer that it has started supplying insulation tubes to, which it hopes to help boost the company’s sales and utilisation rate at its new plant in Vietnam.

The Vietnam plant, which commenced operations after the first quarter of this year, is now running at about half its capacity. The company is optimistic that the plant will see a utilisation hit of about 75% by the end of the current financial year ending April 30, 2020 (FY20), when it will break even due to economies of scale.

At present, the bulk of the plant’s sales comes from the Vietnam market. The additional capacity gives Superlon the space to secure more sales from overseas customers, said its executive director Jeremy Liu.

“The products we are supplying to the Australian customer is a different grade [of material], it is more to do with fire resistance, [to meet] Australia’s building code certification. And as opposed to the older products used for household, we are now getting into industrial, building and commercial areas that need better certification,” Liu said when met recently.

Upbeat about the company’s prospects, Liu said Superlon also has plans to raise the insulation production capacity of its Malaysian factory by 20% by FY22, via the replacement of machinery with more sophisticated and energy-efficient models to improve automation. This capacity expansion will be undertaken in phases, Liu said.

Superlon’s current total production capacity for thermal insulation material — which combines its Vietnam plant’s capacity with its Malaysian counterpart — is at about 10,000 tonnes per annum.

More R&D investments to diversify product range

The company also plans to invest more in research and development of products for use outside the heating, ventilating, air conditioning and refrigerating — HVAC&R-industry. “We are still researching new kinds of products to diversify our product range so we can sell our products to more markets and more industries,” Liu said.

In line with this, Liu said Superlon has developed an acoustic foamed rubber that is primarily designed for sound absorbing and vibration dampening, which it named Acoustec.

The company started selling Acoustec six months ago to the automotive aftersales market, not just locally but also overseas, like in India.

“We are starting with the automotive industry first because this is the industry in which we are most confident with our product. But in the future, we want to diversify into other industries as well,” said Liu.

“We have been selling this product for six months, it is slow progress, but I hope sales from this will increase. At this juncture, Acoustec. has yet to contribute meaningfully to the company,” he shared.

Superlon’s decision to look elsewhere for more sales is prudent, given that the company’s net profit fell 13% year-on-year (y-o-y) to RM2.49 million in its first quarter ended July 31, 2019 (1QFY20), as it faced a competitive environment, while costs of material climbed. The twin effects of these crimped its gross profit margin, despite revenue rising 10% y-o-y to RM28.22 million from RM25.72 million on higher demand for its insulation and trading products.

Competition will continue to heighten, said Superlon managing director (MD) and chief executive officer Jessica Lee Hsiu-Lin, who sees increasingly more Chinese players coming into the company’s space, particularly in the Vietnam market.

“Competition is always there, as has been the case for the past three years. This market won’t be smooth sailing, and there are always new players coming in. The only way [to deal with such competition] is cost control — by improving the company’s efficiency,” she said.

Having said that, she remains confident that Superlon’s Vietnam plant will see improved utilisation, while a stronger US dollar will help boost the company’s gross profit margin, which came in at 26% in 1QFY20 — an improvement to the 23% it recorded in 4QFY19. This came as Superlon enjoyed better sales volume and a favourable exchange rate movement, on top of production efficiency and stronger operating results from its Vietnam operation.

Still, it should be noted that Superlon’s gross profit margin in 1QFY20 is lower compared with the average 29% recorded for FY19 and 31% for FY18.

Superlon’s FY19 net profit was down 16% y-o-y to RM10.29 million from RM12.27 million in FY18, due to lower revenue, less favourable sales mix and unfavourable foreign exchange rate. Earnings were also dragged by preparatory, setup and commissioning costs at its Vietnam plant. Revenue slipped 3% y-o-y to RM105.70 million from RM109.39 million.

‘Stock fairly valued, with subdued near-term outlook’

With selling prices under competitive pressure and raw material prices expected to stay at elevated levels-at least for now-MIDF Research analyst Ng Bei Shan said Superlon’s near-term outlook remains subdued.

Nevertheless, Superlon’s margin may improve if its volume continues to increase as it expands its product offerings and penetrate other markets.

“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 the prolonged competitive pricing landscape,” she said in a note distributed on Sept 27.

Hence, while maintaining her “neutral” call on the stock, Ng lowered the target price to 97 sen from RM1.04 previously.

In contrast, another analyst thinks the worst is over for Superlon and expects its results to progressively improve going forward, driven by increased volume and improved operations in Vietnam.

“I think it’s not difficult for its management to achieve break-even for its Vietnam plant by end-FY20 as Vietnam has been one of their largest customers. They can also fill up the capacity by shifting production for Vietnam customers from Malaysia to Vietnam,” said the analyst who preferred not to be named.

“But at the price of 90.5 cents, the stock is valued at a forward FY20 price earnings ratio of roughly 13 times, which is fairly valued in our point of view given the competitive landscape and its suppliers having a better say on their raw material prices,” he added.

Superlon’s share price fell from its all-time high of RM2.75 on Aug 31, 2017, to as low as 78.5 sen on Aug 30 this year. Last Friday, the stock settled at 96.5 sen — down about 65% from its record high — valuing Superlon at RM153.17 million.