• Selldown overdone. SUPERMX’s share prices tumbled 12.6% from 2M high of RM2.38 (21 Nov) to a low of RM2.08 yesterday amid weak 1Q17 results, dampened by higher raw material costs and lower ASPs at the rubber glove segment. In addition, the new contact lens business incurred higher advertising and promotion expenses to ramp-up its market penetration.

• Values emerge. SUPERMX valuations have turned attractive following recent sell-down, as it is trading at 11.8x FY17 P/E (41% below peers) and 1.37x P/B (67% discounts peers), supported by decent yield of 2.9% (32% higher than peers). We opine that such valuations have priced in most of the negatives and provided sufficient margin of safety to cushion further sharp decline.

• Steeply oversold. We see limited downside risk in anticipation of better results ahead amid gradual ramp-up of the remaining capacity in the coming quarters. A weaker RM is positive for Supermax, as >95% of revenue is denominated in the US$, while a sizeable portion of cost is denominated in RM). Meanwhile, we expect currency gains and improved glove demand-supply dynamics in the short/mid term (on the slower industry capacity expansion) to aid in alleviating margin compression.

• A decisive breakout above RM2.14 (10-d SMA) will spur prices higher towards RM2.21 (20-d SMA) and our LT objective at RM2.38. On the flip side, key supports are RM2.05 (lower Bollinger band) and RM2.00. Cut loss at RM1.95.

Source: Hong Leong Investment Bank Research - 15 Dec 2016