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Sunday, June 19, 2016

This gem fits into the high ROIC requirement of i3 sifu KC Chong and investors are accumulating!

This gem fits into the high ROIC requirement of i3 sifu KC Chong and investors are accumulating!

Author: smallcapgem2016   |   Publish date: Sun, 19 Jun 2016, 12:02 AM

Computation of ROIC
Using ROIC formula given by value investor and sifu of many i3 bloggers KC Chong, I calculated the ROIC for this gem!
NOPAT = Earnings Before Interest & Taxes (Ebit) * (1 - Tax Rate)
IC = Net operating working capital + Property, plant and equipment

Ebit (in thousands)

Tax rate


Net working capital





The computation shows that the ROIC for this gem is 24.3%, more than twice its WACC. My required return or WACC is 10%, not very high as it has strong profit growth and free cash flows. The ROIC for this gem is higher than most rubber glove stocks.

One thing to look for is that when ROIC is greater than WACC, value is being created for the stakeholders.  When this ratio is less than WACC, value is being destroyed.  On very broad terms, a firm with a higher spread between ROIC and WACC tends to be more valuable than a firm with a lower spread. - KC Chong

In conclusion, this gem created value for the stakeholders and is more valuable than most rubber glove stocks. Let's look at the price of this gem to decide whether it is still undervalued.

The stock price just started to move, but quite flat YTD.
Big buyer of shares in this gem last week. Could it be the famous investor? To beat the famous investor is to buy before he becomes a major shareholder! 

Continuous Growth in Quarterly revenues and profits for the past two years! A key requirement for the famous investor. And dividend paid every quarter in FY 2016-4-30!
This gem is the rising star Superlon, a leading insulation material manufacturer. 

For the first nine months of its financial year ending April 30, 2016 (9MFY16),
Superlon's net profit doubled to RM12.96 million or 16.32 sen a share versus RM53.64 million or 7.73 sen a share a year ago. Revenue meanwhile grew by 24.55% to RM66.81 million, from RM53.64 million a year ago. The significant improvement was mainly due to increased efficiency leveraging on better machinery and higher volumes. (MIDF Research)
Balance sheet analysis
SUPERLON has a super-strong balance sheet with current ratio of 5 times and net cash position of RM 27.3 mil. 

Huge growth potential
According to Panasonic, demand for airconds are expected to increase 120% in second quarter of the year. This is great news for SUPERLON. It has the largest market share, 55% to 60% of the domestic rubber thermal insulation industry.
To cope with huge demand, SUPERLON is expanding production capacity and building a new 70,000 square feet warehouse next to its existing factory. 

Concluding Remarks
Superlon will announce Quarter 4 results this month. Based on historical data, Quarter 4 is the best quarter!
If you annualise the past 3 quarter EPS, you will arrive at EPS of 21.76 sen for FY2016. At current price of RM2.09, prospective PER is only 9.6 times. This valuation is low compared to other rubber-product stocks where PER is 15 to 25 times. 
This also fits into the requirement of KC Chong and the famous investor, PER less than 10 times! Based on the high ROIC of 24.3%, Superlon deserves higher PER valuation.
A final dividend of 3 Sen per share in 4Q FY16 will bring total dividend to 12 Sen per share or dividend yield to 5.7%, highest in the industry.
If you input a lower PER of 13 times for its smaller market capitalisation, fair value for SUPERLON is RM2.82, a big 35% upside!

Big buyers are accumulating...Looks set to cross RM2.30 by end of this month!

Information is for educational and informational purposes only and is not be interpreted as financial advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.

Superlon - a potential replication of Ulicorp (closed at Rm6.10 last Friday)

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