• We are optimistic on Supermax’s prospects, post-results briefing yesterday which prompted revision to our key assumptions and further solidify our view for explosive earnings expansion over the next few quarters.
• Supermax expects to achieve supernormal FY21 earnings mainly due to i) higher ASPs from OBM business and ii) exponential surge in demand due to Covid-19 supported by additional planned capacity.
• We revised our FY21F/FY22F earnings by 45%/40% to factor in the higher ASP and better margins than expected.
• Maintain BUY with higher TP of RM29.00. This is based on 20x PER pegged on FY21 EPS of 145 sen.

Demand visibility to continue.

Management indicated that demand for gloves remained robust and will continue for the next 1.5 to 2 years with current production capacity in oversold position. Order lead time is rising to 10-12 months with buyers willing to pay 30%-50% advanced deposits to secure the orders. It is noted that the company’s financial position has strengthened with net cash position of RM852.7m in FY20 (from net gearing 0.2x previously).

Better results in the next few quarters.

Supermax’s better results is expected in the next few quarters as the highest ASPs to-date have not been fully reflected in 4QFY20. Management guided that its blended ASPs at manufacturing side are already at the highest level compare to its peers (USD120/ 1k pcs vs peers USD80-100/ 1k pcs). Blended ASPs have increased about 3.5% mom in July and expected to increase 3-5% mom in the next few months. As for end consumer side, price varies averaging USD160-180/ 1k pcs with some orders from government agencies even willing to pay USD200-300/ 1k pcs. Overall, we expect Supermax to record an extraordinary earnings growth in FY21 with sequentially supernormal earnings next few quarters on the back of higher ASPs (which is expected to peak in 1HFY21), higher capacity, and increase in economies of scale.

Earnings revision.

We raised our FY21F/FY22F earnings higher by 45%/40% respectively, as we factor in higher ASP and better marginsthan expected. We now expect net profit margin to be higher at 40.7%/26.3% in FY21/22 (+11ppts/ +5.4ppts from our previous estimate).

Maintain BUY with TP RM29.00.

Maintain BUY with higher TP of RM29.00 from RM20.00. Our valuation is based on PER of 20x (in-line with +1.5SD above 5-yrs historical forward mean) and pegged on astronomical growth of 275% yoy in FY21 EPS of 145 sen. We like Supermax due to i) higher yield from OBM distribution business model vs its peers, and ii) constant evolution activities (e.g. automation and cost efficiency).

Source: BIMB Securities Research - 12 Aug 2020