Highlights

The way I see it

Author: omione   |   Latest post: Wed, 5 May 2021, 10:13 PM

 

SUPERMAX EARNINGS RIGHT ON TARGET

Author:   |    Publish date:


**********

Fret not. Supermax earnings for 3Q21 are on track.

In my blog post, Nov 18, 2020, SUPERMAX SHARE PRICE CRUMBLES – TO SELL NOW OR TO BUY MORE?, I forecasted the Supermax FY21 earnings to be Rm4,100 million or Rm4.1 billion. At that time, the average forecast among the ten investment analysts was Rm3.17 billion (see SUPERMAX – SHOULD YOU TRUST RESEARCH HOUSES? ). That average ranged from the low of Rm1.69 to 3.9 billion. My 4.1- billion forecast was so radical a number that some i3 readers didn’t mince words in their contempt.

My quarterly forecasts published on Nov 18, 2020, versus actual, were as follow:

 

Actual (mil)

Forecast (mil)

1Q21

790

800

2Q21

1,059

1,000

3Q21

1,005

1,100

4Q21

?

1,200

 

The variance between my forecasts and actuals for the three quarters is just Rm46 million. As Supermax in its 3rd quarterly commentary asserted that had it not been for the Meru plant closure (and possibly, the shortage of containers as per the report by Hartalega on May 3) and the contribution to the government, I believe, my forecasts would have been on target. If Supermax can operate without further hiccups from Apr-Jun, will it not achieve Rm1.24 billion profits in 4Q21? I think it is more than doable.

If Supermax FY21 earnings come in at Rm4.1 billion as per forecast, the expected EPS (net of treasury shares) will be Rm1.56. At the close of the market today, Supermax price ditched to Rm5.57. The valuation of a 3.5 PE does indeed make a mockery of a supposedly efficient market.

What exactly is causing such mispricing of, probably, the most profitable listed company (in terms of EPS) in Malaysia? I think all the capable Sifu’s out there will have their explanations. I shall not venture there. Let’s leave it at that.

But why were my forecasts so much closer to the actuals compared to those made by the professional analysts? Luck, perhaps. Or could there be more?

When the price started to retreat in Aug 2020 despite the continuous strengthening of the earnings, I would say it was due to profit-taking.  The stock attempted two rallies on Sep 1 and Oct 15. Each time, they failed to break through the previous high. After that, the price continued to decline to Rm3.76.  The decline from Oct 21 to Apr 6 was in large part due to the fear of the arrival of vaccines. The investors (Supermax stocks are largely dominated by retail players) were afraid that the vaccines would crater the demands for gloves. This fear was consequentially egged on by the lies and misinformation propagated by the incompetent analysts as well as the big con like JP Morgan.

In my Dec 3 report, SUPERMAX BONANZA: HOW TO TREAD THE MINEFIELD TOWARDS IT, I laid out the facts and rumors at that time. I coined them “A bird in the hand” versus “Two birds in the bush.” The facts laid out then are playing out very accurately now. The covid-19 infection, as we all know now, continues to plague the world. The demand for gloves has shifted. Segments of the industries that never used gloves before are now using them. Glove demand has not cratered by the vaccines as feared.

So, what is holding back the Supermax stock price from rallying? The stock price has rallied from the low of Rm3.76 to the high of Rm6.48 – a whopping 72%. But what is holding it back from rallying even higher? The misinformation that is disseminating by the bears has now switched from vaccines to overcapacity. It is instilling fear and confusion among many investing players. I do not pretend that overcapacity is a non-issue. Every informed player should see incremental capacity coming. (Note: I use “incremental capacity” here instead of “overcapacity.”) Economics 101 teaches that when an industry experiences abnormal profits, competitions will eventually normalize them. Such a cycle afflicts all industries. At this time, the glove and semiconductor industries are experiencing outsized profitability. At other times, it was oil, palm oil, travel, etc. But stock prices will ride the waves of these ups and downs. So, the difference between “incremental capacity” and “overcapacity” is, it takes time for the glove industry to ratchet up to overcapacity. We are far from that.

It is precisely the issue of capacity, I believe, that sets my forecast apart from the pact of professional analysts. I expected the prices of gloves to taper gradually over time. But I also took into consideration that as prices of gloves taper, the production capacity of Supermax would also rise. The capacity increase offsets the effects of price tapering. This balancing act has played out in the Supermax 3Q21 earnings report. Despite the softening of ASP as reported by Supermax, the increased capacity sustains the 3Q21 profit vis-a-vis 2Q21. Had it not been for the Rm75-million contribution to the government’s pandemic fighting efforts and the Meru production shutdown, Supermax 3Q21 would have held out by the increasing capacity despite a lower ASP.

By the end of 2022, Supermax will have expanded its capacity to 48.425 billion, a 122% increase from pre-pandemic. I have not yet worked out any earnings forecast beyond FY2021. But based on the ballpark, I can safely expect that Supermax earnings will hover between Rm3 to 4.5 billion annually despite ASP tapering, at least for the next two to three years.

Stock prices do not often reflect fundamentals. Stock prices can detach from reality longer than investors can remain solvent. The stock market can be very fluid. With a still strong earnings visibility ahead driven by increasing capacity despite tapering ASP, my bet is still on Supermax to have another massive rally when all the stars align.

Will the next rally hit my target of Rm40? Let’s see.

 

**********

 

 

 

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Labels: SUPERMX

Related Stocks

Chart Stock Name Last Change Volume 
SUPERMX 3.75 +0.12 (3.31%) 25,231,400 

  4 people like this.
 
brian3381 Bla bla bla. Stil wan to denied?
05/05/2021 10:26 PM
gohkimhock are you high on toddy?
05/05/2021 10:56 PM
abang_misai sudah makan ubat kah?
05/05/2021 11:01 PM
Foker Lol garbage analysis. Who didn't expect RM 1 billion?
06/05/2021 12:00 AM
Foker Looks like omnione is either a newbie or someone who is trying to get rid of his tickets.
06/05/2021 12:00 AM
Foker Either way, his analysis is so pathetic, I don't think it can even convince a 12 Yr old
06/05/2021 12:01 AM
Foker BTW, the actual profit is RM 1.4 billion. So you are not right on track. You are just as bad as the other analysts. But this doesn't matter. All you can think about a win is that your prediction comes true. But you can't even predict accurately beyond 1 quarter, even if u get it right for one quarter, which you didn't, you won't be able to get it right the next 3 quarters. So you have zero advantage.
06/05/2021 12:04 AM
Citadel9999 Post removed. Why?
06/05/2021 12:38 PM
Citadel9999 go study fundamentals analysis 101
06/05/2021 12:39 PM
djibaok Currently Supermax price below RM 5 (-0.64 (-11.49%))... on target sor chai style...
06/05/2021 12:54 PM
Citadel9999 rm 40 wor , next life maybe can hit la hahahahah
06/05/2021 12:56 PM
bpsiah Thanks for the write up and your opinion very encouraging. The show is still on so we wait to see the outcome.
06/05/2021 1:00 PM
newbie8080 RM40 is possible, next 10 years from now when their annual capacity reached 100 bil with blended ASP of USD40 with assumptions USD1=RM4 and pe=13x
06/05/2021 1:09 PM
Maxpowar Detailed write up, thanks for the effort. I fully agreed. Keep it up!
06/05/2021 1:14 PM
CharlesT Posting very positive articles can help to stop the price fm coming down meh???

Kyy tried so n posted much more articles than u lah..price still crash till he was forced to cut win in Mac/ early apr
06/05/2021 1:39 PM
GroundZeroIII whatever he was having, im pretty sure it was a strong one
06/05/2021 2:46 PM
Citadel9999 use Ur money support don't just write an article, useless!!!
06/05/2021 2:51 PM
CharlesT He could be the first one to sell this morning when mkt opens....lol
06/05/2021 3:00 PM
Andre Kua No wonder they said pen can kill. It is either you are ignorant of how much ASP will drop or you have math problem.

First of all, ASP might (I wont say definitely) drop to pre-covid level. If you google, most agreed that glove price at the highest is 4x pre covid level. $90/4 = $22.5 per 1000 gloves

Now work the math.

If $22.5 , then 1 piece is $0.0225
48b x $0.0225 x RM4.1 = RM4.43b revenue

if $25, then 1 piece is $0.025
48b x $0.025 x RM4.1 = RM4.92b revenue

if $30, then 1 piece is $ 0.03
48b x $0.03 x RM4.1 = RM5.9b revenue

Would you mind to share how much profit margin Supermax will get? 80%?

For comparison, lets just say for FY2021, average price for Supermax sales is $70 for the whole year.

if $70, then 1 piece is $0.07
26b (current capacity) x $0.07 x RM4.1 = RM7.46b revenue (kinda close to the estimate)

Even with double the capacity, Supermax would not earn anywhere close to RM4b even if the ASP is $30. That is why their shares is being dump.

You havent even taking into consideration how much excess capacity once covid is over. Dont forget pre-covid, utilisation rate for most glove makers are just around 60-70%. Lets just say Supermax is really popular for whatever reason and they managed to retain 70% utilisation rate of 48b capacity. Whatever result I posted x 70% would be a figure much lower than RM4b revenue. So tell me how do you expect RM4b profit for FY2022?
06/05/2021 3:45 PM
Supermax2020 I like this article! At last one honest well written and substantiated with facts!
06/05/2021 4:21 PM
amateurJR It doesnt matter win or lose money, this pandemic together with glove rally will surely be a unforgettable moment for all winners and losers in gloves.
06/05/2021 6:06 PM
winston1 It doesn't make sense that a company generating 4 billion profit for the next 2 to 3 years will have a pathetic 3.5 pe. Mr market will decide the share price.The rest wait patiently.
06/05/2021 10:05 PM
CynicalCyan Where got right on target? Read those analyst reports and you shall find their disappointment hidden inside. Sayonara to those who bought at the recent hike and still holding the falling knife.
06/05/2021 11:28 PM


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