- We maintain our HOLD recommendation on Supermax Corp with an unchanged fair value of RM2.40/share.

- Supermax posted a 3QFY14 net profit of RM28mil, to bring its 9MFY14 earnings to RM81mil. Annualised, the results were in line with our estimates but below consensus forecasts, making up 71% and 65%, respectively.

- Management had also proposed a tax-exempt interim dividend of 2 sen/share, matching 3QFY13’s quantum-wise. We continue to expect a payout ratio of 30% (or 5sen/share) for FY14F. This translates to a yield of ~2%.

- Following the normalisation of production at its Alor Gajah plant which was hit by a fire incident back in 4QFY13, Supermax’s revenue had rebounded by 17% QoQ. The plant had a capacity of ~200mil pcs/month.

- However, with growth of its operating expenses outpacing that of its topline’s (+20% QoQ) and the disclosure of realised and unrealised forex losses of RM5.9mil in 3QFY14, Supermax’s net profit was only higher by 4% QoQ. Earnings would have been flattish were it not for the slightly lower effective tax rate of 15% registered in 3Q (vs. 16.6% in 2Q).

- While we had anticipated a QoQ decline in its EBITDA margin given that 3Q was the first full quarter to register the impact of the May natural gas tariff hike of 19%, the group’s EBITDA margin had contracted by a sharp 6.6ppts to 11.5% – levels last seen in FY11.

- On a cumulative basis, Supermax’s 9MFY14 earnings were lower by 22% when compared to the same period last year. This comes on the back of a 20% YoY fall in revenue. In addition to lost sales volumes due to the fire, its ASP has also been on a downtrend, tracking the declines in raw material prices (20% for latex and 7% for nitrile, respectively) and competitive pressures.

- At the current price, Supermax is valued at FY14F-FY16F PEs of 12x-14x. In the past 5 years, the group’s PE band ranged from 4.6x to 14.7x. Our valuation is based on an FY15F target PE of 12x, which is 1SD above its 5-year average of 10.2x.

- While this is a steep discount to its peers’ average of 17x, we deem this to be merited given the uncertainty pertaining to its earnings visibility moving forward.

- We are unsure of the progress of its ongoing capacity expansion plans at Plant 10 and Plant 11, but from our last check, we understand that the first batch of new capacities have been commissioned in Aug 2014.

Source: AmeSecurities