• Higher 1HFY19 Core PATMI of RM67.6m (+6% yoy) was due to greater capacity output and lower effective tax rate. Overall, Core PATMI came above our full year forecast at 57%
• QoQ Core PATMI improved 29.5% on higher revenue from greater production capacity, cost efficiencies and favorable exchange rates
• We revised up our earnings forecast for FY19/FY20/FY21 by 8%/7%/7% respectively to account for lower operation cost.
• Maintain Hold recommendation with new TP of RM1.75 based on PER 18x applied on FY19 EPS.

1HFY19 earnings boosted by greater capacity and lower tax rate

Supermax 1HFY19 earnings increased by 6% yoy on the back of strong demand and greater capacity output from commissioning of remaining lines in plants 10 and 11, as well as from 1st batch of production lines from rebuilt Block G, Kemunting Plant. Additionally, lower effective tax rate of 30.5% (-3.3ppts) on lower tax rates in foreign jurisdictions together with higher capital allowance claimed, contributed to improve core PATMI. Overall, core PATMI was above our full year forecast at 57%.

Improved qoq performance

On qoq basis, core PATMI rose by 29.5% to RM38.1m despite revenue increase of only 4.9% due to higher sales and increase capacity output from rebuilt Block G Kemunting Plant. Cost reduction from operational efficiencies, as well as favourable exchange rates mainly contributed to the increase in core PATMI.

Outlook remains intact

Inline with the trend in global demand, Supermax is increasing its nitrile glove production. However, with increased competition in nitrile glove, added pressure is expected on its ASPs. Nevertheless, as the company’s products mix are currently evenly spread between nitrile (52%) and latex (48%), the competitive environment is not expected to greatly impact earnings as compared to its competitors such as Hartalega. We are not overly concerned on recent strengthening of the ringgit vs USD and various cost hikes (0.7% higher gas cost and 10% minimum wage hike) as this will be offset by the recent weakening of raw material prices (45-50% of total production cost) and ongoing cost efficiency efforts.

Hold recommendation with TP of RM1.75

We revised up our earnings forecast for FY19/FY20/FY21 by 8%/7%/7% respectively to account for lower operation cost than expected and improved cost efficiency. We maintained Hold recommendation with new TP of RM1.75 (from RM1.60) based on unchanged 18x PER (3-years historical mean forward PE)

Source: BIMB Securities Research - 13 Feb 2019