• Faced with higher operating cost, i.e. nitrile raw material prices, labour cost as well as A&P cost from contact lens, Supermax is expected to experience pressure on profit margins, hence impacting earnings growth.

• Capitalizing on strong global demand, sales are expected to expand by increased production capacity, targeted at 27.2bn pcs pa (+c.18%) by end of 2019 as well as benefit weak ringgit.

• We revised our earnings forecast lower for FY18 and FY19 to RM118.5m (-16% from previous forecast) and RM130.9m (-14%) respectively and derived a new TP of RM3.25 based on FY19 PER of 18x. Maintain HOLD.

Earnings revised downward

We revised our FY19 and FY20 earnings forecast lower to RM118.5m (-16%) and RM130.9m (-14%) respectively due to higher than expected overall glove operating cost, increased cost in contact lens A&P activities and lower associate contribution. Net profit margin is expected to be slightly lower at 8% in FY19 compare to 8.2% in FY18.

Higher operating cost to impact earnings growth and margins

Supermax recent 4QFY18 earnings saw a huge drop in earnings (- 70.5% qoq) and margin (-7ppts qoq) due to overall higher operating cost (+8.8%) which it was not able to pass on fully to customers. Moving forward, we expect higher operating cost to continue and offset sales growth. Higher nitrile butadiene raw material price (+c.28% yoy), increase in labour cost, as well as increase A&P cost from contact lens business, are expected to derail the earnings growth and margin.

Steady sales growth on capacity expansion

Supermax total sales growth is expected to remain steady, growing at 3-years GAGR of 10.5% in FY19-FY21F. Growth will emanate from strong demand global and increase in capacity expansion, which will result in a total of 27.2bn pcs pa (+c.18%) by end of 2019. The additional capacity will be achieved through i) rebuilding and refurbishing older plants and ii) building new expansion plant at Kamunting Raya, Taiping and Meru, Klang with capacity of 4.2bn pcs pa.

HOLD with lower TP of RM3.25

We maintain our HOLD recommendation and derived at a new TP of RM3.25 (from RM3.45) in light of the revised earnings. Our valuation is a result of revised PER of 18x (from 16x previously) using its 3-year historical mean forward PE. Key risks to our call include a lower than expected gloves demand, stronger ringgit and extended losses from its new venture into contact lens.

Source: BIMB Securities Research - 28 Sept 2018