• Our recent engagement with Supermax’s representative prompted revision to our key assumptions and further solidify our view for explosive earnings expansion over the next 12 months.
• Demand for glove likely to continue in 2021 backed by unabated Covid-19 spread and resurgence fears, supporting higher ASPs at least until 1H2021.

• Supermax revealed a plan to add new plant, i.e. Plant 15 with capacity of 3.75bn pcs p.a.

• We revised our FY20/FY21 earnings by +83%/+169% and maintain BUY with higher TP of RM20.00. This is based on 19x PER pegged on FY21 EPS of 105.3 sen.

Demand visibility to continue in 2021.

Unrelenting worldwide spread of Covid-19 at varying speeds with some countries yet to reach peak infections (eg: US, Brazil, India) and virus resurgence (e.g: Japan, Australia) would ensure continuity of glove demand for 2021, on the assumption that mass vaccine production will not be available at least until mid-2021. Due to this, Supermax estimates that orderbook visibility will remain high until 2H2021. Orders were derived from recurring customers and from government & non government organisations with buyers paying 30%-50% deposits in advance to secure the orders.

Benefiting from OBM business strategy

We expect higher margins going forward, derived from OBM distribution which now accounts for c.95% (c.70% pre-Covid19) due to better pricing power from selling direct to end-customers (chart 3). We believe Supermax is able to record higher ASPs vs its peers where business mainly goes through OEM suppliers. Additionally, ad-hoc/ spot orders allocation (price 2-3x higher than normal) expected to increase to >10% with more new capacity from Plant 12B (2.2bn pcs) coming on stream in 2H2020. We gather that Supermax’s selling prices are higher by c.35%-40% qoq (April June). We believe that selling prices will continue to increase, albeit at a slower pace c.5-10% mom until end of 2020 and stabilize in 1H2021 before gradually decreasing.

Greater expansion plan to cater for higher demand.

Supermax current capacity is about 24bn pcs p.a. In catering to the growing demand, management has recently revealed a new expansion plan. Plant 15 (3.75bn pcs capacity for nitrile glove production) with capex of RM250m is expected to go online in 2HCY2021. With this, Supermax total capacity would be 26.2bn pcs by end-2020 (+c.20% yoy) and 36.4bn pcs by end-2021 (+39% yoy) (refer table 2). Upon completion, Supermax would surpass its closest competitor Kossan in terms of capacity by end- 2021. We are assuming utilisation rate to remain high at c.90% for FY20/21.

Source: BIMB Securities Research - 17 Jul 2020