- We reiterate HOLD on Supermax Corporation with a higher fair value of RM2.15/share (from RM2.05/share, previously) as we roll forward our valuation base to CY16F. We continue to peg the stock at a PE of 13x, +1SD above its 5-year mean.

- Supermax reported a net profit of RM38mil for its quarter ended Sept 2015 to extend its cumulative nine-month earnings to RM88mil. Annualised, the results met our and consensus estimates. (Note that the group has changed its financial year-end from December to June, with its present financial period having 18 months).

- No dividends were announced this quarter. The group had paid out a 2 sen/share interim dividend on 22 October 2015. Our FY16F-FY18F dividend forecasts are premised on its 30% payout policy and translate to yields of 3% at current price.

- Compared to the preceding quarter, Supermax’s earnings had improved by a commendable 55% on the back of a revenue growth of 35%. On a cumulative basis, its ninemonth revenue and earnings were higher by 2% and 9%, respectively.

- Management attributes its better sequential performance to the stronger USD (QoQ: +11%), higher sales volumes as well as improvement in its sales mix (more nitrile gloves).

- We understand that the additional volumes came not only from the commissioning of new lines at Plants 10 and 11 (combined capacity of 6bil nitrile pcs), but also from refurbished production lines.

- The latter, together with the stronger USD and its better sales mix, had helped shore up its EBITDA margin by 1.8- ppt QoQ and 1.6-ppt YoY. The YoY expansion was also due to efficiency gains.

- We make no changes to our FY16F (Jun YE, 18M) to FY18F estimates and HOLD recommendation.

- While the improvement in its performance this quarter suggests that its earnings may be at an inflexion point, we remain conservative given the lack of earnings visibility moving forward, in view of the uncertainty in its expansion plans. We maintain our view that the key rerating catalyst for Supermax would be the smooth execution of its expansion plans.

- The stock 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-25x.

Source: AmeSecurities Research - 27 Nov 2015