Start-up Losses

Supermax reported yet another disappointing quarterly results despite the improving outlook for the Rubber Gloves sector. Although 3Q revenue rose a strong 30% qoq, core net profit fell 13% on a combination of a margin squeeze in the Glove division and ongoing start-up losses in its Contact Lens division, which is still in the nascent growth phase. With the lack of visible capacity growth coupled with the drag from the Contact Lens division, Supermax’s earnings growth is likely to stay tepid in the near term. HOLD.

Higher Revenue on Sales Volume Recovery

Supermax’s 3Q revenue rose a strong 30% qoq to RM308m. The higher revenue was primarily due to a higher sales volume of gloves, as it has completed the refurbishment of its existing capacity that had been a drag on volume sales previously. Supermax also benefited from the higher ASP for gloves sold, as the industry supply-demand equilibrium normalised, along with the weaker Ringgit, qoq.

Margin Squeeze From Higher Raw Material Costs

Despite the higher topline, Supermax’s core net profit fell 13% yoy to RM20m, which came in below our and consensus estimates. Supermax’s contracting margin trend is a stark contrast to that of its peers, as most, if not all, of the glove manufacturers reported margin expansion on higher ASP. EBITDA margin fell 5ppts to 10% during the quarter, one of the lowest margins recorded since FY11. Management attributed the lower margin to the higher raw material prices and its inability to pass through the cost increase, but we believe that Supermax’s lagging efficiency also played a part. In addition, Supermax continued to incur higher start-up losses and marketing costs as it ramps up its Contact Lens division.

Maintain HOLD; TP Unchanged at RM1.90

While the Rubber Gloves sector continues to exhibit resilient volume growth momentum owing to the rebalancing of sector dynamics, we believe Supermax has yet to position itself to capture the earnings upcycle with its lack of visible capacity expansion. The lack of disclosure for its Contact Lens division also makes it difficult to decipher the financial viability of the new business stream. We lower our earnings forecasts by 5%-17% for FY17-19 on lower margin assumptions due to higher-thanexpected start-up losses. However, our TP is unchanged at RM1.90 as we rolled forward our investment horizon to CY18E on an unchanged target PER of 13x.

Source: Affin Hwang Research - 31 May 2017