• Supermax’s 9MFY17 net earnings of RM61.9m was below our expectation, making up 71% of our full year forecast (Consensus below: 57%).

• 9M net profit was 36.2% lower due to higher raw material price and operating costs in 1H. EBIT margin was also lower due to the same reason.

• We maintained our FY17 and FY18 earnings forecast respectively.

• Our target price is unchanged at RM2.29. Maintain HOLD.

Lower earnings YTD.

9MFY17 revenue was flat, at RM814m (-1.4%) but earnings were 23.8% lower mainly due to sudden increase in nitrile (+5%) and latex (+10%). Production overheads, such as natural gas price (+5%) and staff costs (+10%), also rose. Consequently, EBIT margin fell to 8.9% from 15.3% for the same period.

Qoq revenue improved but earnings smashed by higher costs. Qoq revenue improved by 30.2%. However, high latex price during the period, which reached a 5-year peak of RM8.18/kg in January 2017, dragged down earnings by 46.4%. As a result, 3QFY17 EBIT margin fell to 6.5% from 11.3% in 2QFY17.

Maintaining our forecasts.

We expect earnings will improve in the next quarter due to softened raw material costs which has declined by 20% since January 2017. Meanwhile, we believe ASP will likely remain stable due to less fluctuation between USD and ringgit exchange rate. Hence, we are maintaining our FY17 and FY18 earnings forecasts respectively at RM87.5m and FY97.2m, as we expect earnings to catch up in 4Q (Apr-June period).

Valuation.

Our target price is unchanged at RM2.29 based on 16x PER. Maintain HOLD.

Source: BIMB Securities Research - 31 May 2017