KUALA LUMPUR (Dec 11): MIDF Research has upgraded Superlon Holdings Bhd to a "Buy" at 98 sen with a higher target price of RM1.17, from 97 sen previously.

"We came back from Superlon's investor briefing feeling more positive of its outlook. For 1HFY20, gross profit (GP) margin recorded about 27%, which is 6 percentage points lower than a year ago mainly due to higher sales to low margin markets and lower efficiency in the Vietnam factory as well as higher raw material costs.

"On the other hand, the higher GP margin product from a new customer has only started to pick up and we estimate that the orders [make] up about 10% of its year-to-date volume. Looking ahead, we expect this customer to contribute about 20% of its total volume, which should improve its overall GP margin in the coming quarters," MIDF said in a note today.

MIDF said Superlon's management updated that the utilisation rate at its Vietnam plant ramped up to about 50% as of 2QFY20, compared to 30% in 4QFY19 when the plant was completed.

"We believe that the plant is on track to break even operationally and that could help ease its profit margin going forward," it said.

Meanwhile, India, which remains a large market for Superlon, contributing about 20% to its sales, continues to have thin margins due to the competition in the market, said MIDF.

On top of maintaining market share and volume there, MIDF said Superlon is also trying to get into other new markets in South America and selling more to countries that can provide better margins to mitigate the low margin sales from India and fluctuation in raw material costs.

At 10.38am, Superlon's share price was unchanged at 98 sen, giving it a market capitalisation of RM156.8 million.