Supermax reported better operating results to end its financial year on a stronger note, though the net profit was affected by a higher effective tax rate. While we believe the operating environment and sector dynamics for rubber gloves sector has turned more favourable, the lack of visible timeline for capacity growth and the drag from the Contact Lens division are likely to cap Supermax’s earnings in the near term. Maintain HOLD with an unchanged target price of RM1.90.

Better EBITDA and Pretax Margin

Supermax’s 4Q17 revenue rose marginally by 1.4% qoq to RM312.6m, primarily due to higher ASPs and higher sales volume of gloves as the refurbishment of its existing capacity was completed. After last quarter’s disappointment, EBITDA margin for 4Q17 rebounded to 15.1% as the industry supply-demand equilibrium normalised and in turn boosted the pretax margin. These were achieved despite ongoing start-up losses and marketing costs for its Contact Lens division.

Hit by Higher Tax

Despite the stronger EBITDA and pretax profit, Supermax’s 4Q17 core net profit fell 57.8% yoy to RM8.3m due to higher effective tax rate, resulting in a FY17 core net profit of RM70.2m (-31.9% yoy) which was below our and consensus estimates. Recall that the effective tax rate was only 18.0% and 7.7% respectively in the previous two quarters. We suspect that the higher tax rate in 4Q17 may be for previously underestimated tax liability.

Maintain HOLD; TP Unchanged at RM1.90

While the operating environment and sector dynamics of the rubber gloves sector has turned more favourable, we believe Supermax has yet to position itself to capture the earnings upcycle with its lack of clear timeline in capacity expansion. The lack of disclosure for its Contact Lens division continues to make it difficult to decipher the ongoing progress and status of the new business stream. We fine-tuned our earnings forecasts by a marginal 1.1%-3.8% for FY18E-19E on higher revenue and margin assumptions but offset by higher effective tax rate. Due to the minimal earnings revision, our TP remains unchanged at RM1.90 with an unchanged target PER of 13x over FY18E EPS.

Source: Affin Hwang Research - 30 Aug 2017