• Overview. PATMI increased by 64.3% qoq on the back of low base in 4QFY19. To recall, there was a sharp +23% rise in NR latex prices and lower ASP in certain markets during the previous quarter. However, PATMI decreased by 31% yoy to RM24.7m mainly due to lower ASPs and increase in operating cost.
   
• Key highlights. Supermax’s 1QFY20 net profit margin dropped to 6.7% (- 3ppts yoy) due to increase in operating expenses especially natural gas cost which can only be passed on in the next quarter, in our view. We expect ASP to be revised up gradually in the coming quarter to compensate for the higher cost. 
   
• Against estimates: Inline. 1QFY20 PATMI of RM24.7m made up 18% of our and consensus full year forecast. The result can be considered inline as we anticipate better performance in subsequent quarters aided by healthy demand-supply dynamics as well as higher ASP.
   
• Outlook. Supermax’s long term outlook remains resilient on expected growing global demand supported by their capacity expansion c.25% to 27bn pcs pa by end 2020 (refer table 2). The group also has greater flexibility and stability with its balanced product mix (NBR: 52%, NR: 48%). Cost remains manageable underpinned by ongoing cost efficiency efforts and greater automation, in our view. 
   
• Our call. Our earnings forecast remains unchanged at this juncture. Maintain BUY call with TP of RM1.80 based on unchanged 17x PER pegged on FY20 EPS. Downside risks to our call are higher-than-expected production costs.

Source: BIMB Securities Research - 28 Nov 2019