SUPERLN (7235) - Analysis of Superlon Holdings Bhd

Dear Readers

Ever thought something as simple as thermal insulators could be such a profitable business. To understand why, we shall delve into what makes Superlon Holdings Bhd ("Superlon") tick.

Credit: Superlon[/caption]

Overview

Superlon is principally a manufacturer of, among others, high quality nitrile butadiene rubber (synthetic rubber) thermal insulators ("NBR"). NBR is mainly used in Heating, Ventilation, Air Conditioning and Refrigeration systems ("HVAC&R") in residential, commercial and industrial buildings.

Superlon's focuses on the premium segment in terms of quality of its manufactured thermal insulators. Superlon branded those products as its namesake.

The majority of its clients are product distributors and sales agents. You can also find Superlon's products sold on Alibaba.

Superlon's secondary activity is the trading of HVAC&R components, The earnings from trading is nominal and will not be mentioned in this write-up.

Manufacturing of thermal insulation

Insulation is extremely effective at saving energy. The science behind insulation is rather simple; to stop heat transfer.

Imagine turning on the water heater on a cold winter's night. When hot water runs through the pipes, heat from the hot water dissipates because the hot water pipes are exposed to the cold environment. Energy is then wasted.

On the other hand, in a tropical climate, such as the one in Malaysia, insulation works the other way around - by keeping heat from affecting air conditioning or refrigeration systems. That way, the air conditioning compressors do not have to work harder to keep the air cold. A thermal insulator will also prevent air conditioning or refrigeration pipes from sweating (or condensation) by preventing hot air to come into contact with the cold pipes. This prevents water damage to building structures, furniture and machineries.

These are a couple of scenarios where thermal insulators are utilised to achieve energy savings and to prevent condensation.

Energy savings, although may not seem much at first glance but at a grander scale, such as air conditioning or refrigeration systems in shopping malls, hotels, airports, mega factories or cruise liners, thermal insulators take on a much impactful role.

Superlon diversifies production, from thermal insulators to exercise mats (yoga mats) and acoustics insulators. If you are unsure of what an insulation foam is, have a feel of a yoga mat.

Superlon's thermal insulators have a market share of about 50-60% in Malaysia. Its major export markets are Asia, North America, Europe, Oceania and more recently, Africa. Major markets in Asia include India and Vietnam.

Its manufacturing site is located at Klang, Malaysia.

On top of that, Superlon also sells adhesives, copper tubes, compressors, refrigerant gas, vacuum pump, fan motor and a variety of temperature and gas detectors.

Financials

DATA	2017	2016	2015	2014	2013
REVENUE (RM’000)	106,269	90,411	74,509	61,787	59,959
PROFIT (RM’000)	23,715	16,660	9,381	5,851	4,098
OPERATING PROFIT (RM’000)	30,379	21,555	12,845	8,047	4,471
SHAREHOLDERS’ EQUITY (RM’000)	107,989	89,444	79,940	59,062	55,766
DEBT (RM’000)	36,093	20,153	17,485	13,946	13,093
RATIO
DEBT TO EQUITY RATIO	0.33	0.23	0.22	0.24	0.24
OPERATING PROFIT MARGIN	0.28	0.23	0.17	0.09	0.07
OCF RATIO	0.76	1.78	1.19	1.01	1.20
PROFIT MARGIN	0.22	0.18	0.12	0.09	0.06
EPS (CENTS)	29.87	20.98	11.81	7.34	5.19
EPS (ADJUSTED) CENTS	14.82	10.41	5.86	3.66	2.56
DPS CENTS	11	9	8	3.3	1.8
DIVIDEND PAY OUT (%)	36.8	42.9	67.7	45.0	35.6
P/E	11.38	9.39	10.33	8.72	6.74
ROE	21.96	18.62	11.73	9.91	7.35

 

Over the course of 5 years, there was a significant improvement in areas such as: turnover (revenue), profit, profit margin, dividend and cash flow (OCF ratio).

In 2013, Superlon achieved a profit margin of 6%. Fast forward to 2017, that profit margin increased exponentially to 22%. Concurrently, return on equity also increased threefold.

The factors which contributed to the increase in earnings and revenue were increased sales volumes, the weakening of Ringgit Malaysia, lower raw material costs and increasing production efficiencies (economies of scale).

The major raw materials which make up the production of NBR are acrylonitrile and butadiene. The price of both raw ingredients intertwines with the price of crude oil. Therefore, a low and stable crude oil price will translate to lower raw material costs.

During the years under review, earnings per share increased at a growth rate of 41%. That is phenomenal.

To keep up with demand and production, Superlon started the construction of a warehouse in 2016. The warehouse is now in operations. The construction of the warehouse hopes to alleviate the production bottleneck caused by the lack of storage space in Superlon's factory. The freed up space in the factory will be utilised for the installation of more production lines. This is expected to add to its manufacturing capacity by an additional 30%.

Potentials

Superlon is in the midst of erecting a new factory-cum-warehouse in Vietnam. This is Superlon's first overseas production plant and is expected to commence operations in the first half of FY19 (1H FY19). Not much details are available about the said production plant except that the company is set to invest about USD4 million to its setting up.

An expansion to Vietnam makes so much sense it is already one of Superlon's major export markets and is geographically closer to Superlon's other export markets, such as India and the cluster of South East Asian countries. In addition, the cost of doing business in Vietnam is well below that of Malaysia due to its lower wage level.

Conclusion

I like Superlon for:

1. Increasing its earnings at an incredible rate.
2. Tapping export markets such as Vietnam and Africa.
3. Strong research and development (extended product range to acoustic insulators).
4. Capital expenditure on the construction of a warehouse in Klang and a manufacturing site in Vietnam.

Superlon is unattractive for the following factors:

1. Share price has increased about 165% from a year ago.
2. Affected by the volatility of raw material price (crude oil) and currency fluctuation.
3. Capital expenditure in Vietnam may not be a fruitful venture.

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Disclosure

I do not own any shares in Superlon.

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