• Overview. 3QFY20 revenue increased to RM447.2m (16% qoq, 24% yoy), while PATMI jumped to RM71.1m (136% qoq, 105% yoy). The excellent results were mainly due to i) exponential surge in demand due to Covid-19 together with new additional production capacity, ii) higher ASP, iii) lower overall production costs and iv) weak ringgit vs USD. Margin improve to 15.9% (8.1ppts qoq, 6.3ppts yoy).
• Key highlights. Supermax current utilization rate is c.90% and order lead time increased to > 8 months (vs 2 months normally), fully booked until early next year. More than 50% of Supermax’s products are sold under OBM (vs peers mostly OEM) and 7 own associates distribution centres (including US, UK, Hong Kong). We believe this gives better yield in ASP as gloves are sold to end customers at distribution price, hence increasing its margin. During H1N1, Supermax record a higher increase in net profit margin compared to peers (average Supermax: c.+5 ppts vs Peers: c.+2 to 4 ppts qoq).

• Against estimates: Above. 9MFY20 PATMI of RM126m (+16% yoy) made up 90% and 85% of our and consensus full year forecast respectively. Results were above our estimate mainly due to higher ASP and margin than expected.

• Outlook. A prolonged Covid-19 (which the outbreak duration is longer than our previous expectation) is positive for glove demand, hence outstripping supply and giving opportunity to increase ASP. This implies firmer-than-expected margins. As such, we raised our earnings forecast higher for FY20/21 by 40%/85% respectively as we increased sales and imputing higher ASP c.10-15% as well as lower tax rate. We now expect profit margin to hold at c.11.5%/14% in FY20/21. Long-term outlook remains promising due to higher global demand on greater healthcare awareness supported by capacity expansion of c.46% to 38.2bn pcs pa by end 2022.

• Our call. Our TP is raised to RM6.00 based on higher PER of 27x (from 19.5x), which is c.30% discount to our glove sector forward PER and pegged on revised FY21 EPS. Despite its seemingly high valuation, we believe the stock deserved further re-rating to better reflect its strong prospect in anticipation of greater increase in ASP and earnings growth (+63%/+45% yoy in FY20/21) as well as constant evolution activities (e.g. automation and cost efficiency). Maintain BUY.

Source: BIMB Securities Research - 21 May 2020