• Overview. 2QFY20 PATMI increased by 22% qoq to RM30.2m on the back of increase in sales volume supported by new additional capacity (Block A - plant 12) during the quarter. However, PATMI decreased by 21% yoy mainly due to lower ASP and higher overall operation costs. There was a sharp +14% yoy rise in NR latex prices as well as higher labour costs.
• Key highlights. Supermax’s 1HFY20 core PATMI dropped 18.7% yoy as margin fell to 7.3% (-1.7ppts). This was mainly due to lower ASP as well as higher operation costs especially natural gas, latex raw material prices and labour costs, which have a time lag in passed-on cost. We expect higher ASP in the coming quarters to compensate for the increased costs.
• Against estimates: Inline. 1HFY20 PATMI made up 40% and 42% of our and consensus estimate respectively. The result can be considered inline as we anticipate higher earnings in subsequent quarters aided by surge in demand due to Covid-19 outbreak as well as better margin supported by manufacturing efficiency and cost control efforts.
• Outlook. Following the recent Covid-19 epidemic, Supermax said it has experienced stronger demand beginning January and we expect the impact could be observed in its 2HFY20 results. The group has strong exposure in the Asian market as compared to its peers with China sales c.6% of its total sales (chart 1). Long-term outlook remains resilient on higher global demand supported by capacity expansion of c.18% to 27bn pcs pa by end 2020 (table 2). The group also has greater flexibility with its balanced product mix (NBR: 60%, NR: 40%).
• Our call. Maintain BUY with new TP of RM1.95 (from RM1.80) based on higher PER of 18x (1SD above 5-yrs historical forward mean) from 17x pegged on FY20 EPS. We remain optimistic that the stock could trade above +1SD in anticipation of demand ramp-up and higher earnings growth in subsequent quarters. Additionally, we also note that Supermax valuation rose up to +2SD during H1N1 (chart 3).

Source: BIMB Securities Research - 26 Feb 2020