• Supermax posted a good set of results with revenue and core PATMI for 1QFY19 growing by 17.6% and 5.5% yoy respectively.

• Higher 1QFY19 core PATMI of RM29.4m (excluding one-off insurance claim for consequential loss of RM6.5m) was mainly due to higher sales volume from additional production capacity, as well as improved operational efficiency.

• Overall Supermax’s 1QFY19 core PATMI was in-line with our estimates making up 24.8%.

• Maintain Hold recommendation with a TP of RM3.25 based on PER 18x applied on FY19 EPS.

Higher earnings on increased production and demand.

Supermax posted a good 1QFY19 results, as revenue and core PATMI grew to RM367.1m (+17.6% yoy) and RM29.4m (+5.5% yoy) respectively. The results were in-line with our full year earnings forecast at 24.8%. The results were driven by increase in sales volume mainly due to strong global demand growth especially for nitrile gloves, additional production capacity in its 2 newest plants (+ 5.6bn pcs p.a) with higher average utilization rate and improvements in operating efficiencies.

Improved qoq performance

Core PATMI, excluding one-off insurance claim for consequential loss of RM6.5m, increased more than 100% qoq mainly due to higher sales, stronger USD vs MYR, decrease costs from improved operational efficiency and lower effective tax rate. Overall, core PATMI margins expanded by 5ppt qoq to 8%.

Outlook remains positive on volume growth.

We foresee Supermax earnings outlook to remain intact arising from current strong global demand, weaker ringgit, as well as cost efficiency. Supermax capacity expansion is expected to increase to 27.2bn pcs pa (+c.18%) by end of 2019. The additional capacity will be derived from 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 recommendation with TP of RM3.25

We maintain our TP of RM3.25 based on 18x PER (3-years historical mean forward PE) applied on FY19 EPS. Our Supermax PE valuation is at a steep discount of c.30% compared to the sector’s average PE. We believe this is fair on account of its i) lower margin compared to Hartalega and Top Glove and ii) inferior capacity expansion and innovation versus peers.

Source: BIMB Securities Research - 2 Nov 2018