-  We reaffirm our HOLD recommendation on Supermax Corp with an unchanged fair value of RM2.15/share following the release of its 2QFY13 results.

-  Supermax reported a decent net profit of RM68mil for 1HFY13 (YoY: +17%), which came in within our expectations. Interim earnings accounted for 47% of our full-year FY13F forecast of RM145mil, and 49% of street estimate of RM138mil.

-  On a sequential basis, earnings grew 12% on the back of a 3% rise in revenue. The improved performance can be attributed to higher glove sales volume (+4bil pcs QoQ) amid a favourable operating environment.

-  EBITDA margins were stable both QoQ and YoY at 14%, aided by fairly stable raw material prices (~55% of costs). Latex prices averaged at RM5.72/kg in 2QFY13 (-7% QoQ) while nitrile prices hovered around USD1,217/tonne (-6% QoQ).

-  On its capacity expansion plans, management is confident that the group will be able to allocate additional sterilisation capacity for its surgical gloves by October 2013 and that the new packaging machineries will arrive soon. With these in place, Supermax may begin commercialisation of its 2 remaining lines at Lot 42 (+174mil pcs in total).

-  We understand that Supermax is also speeding up its construction plans for plant 10 and 11 as well as the refurbishment of an old plant which will collectively increase its installed capacity by 30% (or 6.8 bil pcs of nitrile gloves) to 23 bil pcs in FY13F. Upon completion, nitrile gloves will make up 53% of Supermax’s product mix from the present 39%.

-  Looking ahead, we expect Supermax to register strong earnings for 3Q aided by the recent rally of USD against the RM (+12.5% since May 8). Unlike the other glove manufacturers, the group does not hedge its receivables with forward contracts.

-  As expected, no dividends were declared this quarter. Our gross DPS forecasts (premised on a 30% payout ratio) translate into an average yield of 3.2% for FY13F-FY15F.

-  At current price, Supermax is valued at a PE of 11x and 10x FY13F-FY14F earnings. In the past 5 years, the group’s PE band ranged from 3.8x to 14.8x. Average PE was 9x.

-  While this is a steep discount to Hartalega’s 20x and Top Glove’s 18x, we deem this to be fair given its clouded earnings outlook due to uncertainty in its future expansion plans in FY14F (construction of Glove City has yet to commence).

-  We believe that any delays will place it at a disadvantage to its peers given the current healthy global glove demand (FY13F: +12%) and its present oversold position in both natural rubber gloves (30-45 days) and nitrile gloves (2 months).

Source: AmeSecurities