- We reiterate our HOLD recommendation on Supermax Corporation with a lower fair value of RM2.05/share (vs. RM 2.20/share, previously) following a 13%-17% reduction in our earnings forecasts post its weaker-than-expected results announcement. We continue to peg the stock at 1SD above its 5-year mean, i.e. at 13x its CY15 EPS.

- Supermax’s earnings of RM50mil for the six months ended June 2015 came in below expectations, accounting for only 40%-43% of our and consensus annualised estimates. (Note that the group has changed its financial year-end from December to June, with its present financial period having 18 months).

- Revenue for the period was lower by 4% but its net profit declined by a larger 7% as margins were marginally crimped. On a sequential basis, its net profit for the quarter was flat at RM25mil although its top line registered a 3% growth.

- We had expected the group to register stronger numbers beginning this quarter in view of new capacity coming onstream from its recently completed Plants 10 and 11.

- However, as management attributed the QoQ topline growth to stronger USD:RM rates and made no reference to volumes, we remain cautious on the progress of the commissioning of these new lines. We have thus lowered our planned capacity assumptions for the group.

- On a more positive note, Supermax announced a 2sen/share single-tier interim dividend for this quarter. Our dividend forecasts are premised on its 30% payout policy and translate to yields of ~2% at the current price.

- From a valuation standpoint, Supermax appears to be cheap in relative to its peers. It is currently trading at forward PEs of only 9x-12x. This is mid-range of its 5-year mean PE band of 6x-15x, but at a steep discount to its peers’ present average of 20x-23x.

- Most of the rubber glove manufacturers have been experiencing a PE expansion this year in tandem with the surge in their share prices (outperforming the market by 60% on average). This has in part been spurred by the strong USD (YTD: +21% against the RM) and the glove players’ prime position as exporters operating in a defensive sector.

- While Supermax also benefitted from the positive sentiment (YTD share price appreciation of 33%), we believe that its upside had been capped by its weaker earnings visibility visà- vis its peers.

- We maintain our view that the key re-rating catalyst for the group would be the smooth execution of its expansion plans, namely the commercial operations of Plants 10 and 11, Glove City and Supermax Business Park. The progress of its contact lens manufacturing venture is also unknown.

Source: AmeSecurities Research - 27 Aug 2015