Supermax (SUCB) reported a relatively strong set of 1QFY18 numbers, with net profit of RM27.9m (+43% yoy, +234% qoq) coming in above our and consensus expectations and constituting 29-30% of the full-year forecasts. Similar to other glove manufacturers, SUCB benefited from stronger glove demand, which helped it command better pricing. As we believe the industry will continue to benefit from the trend, we are revising up our EPS forecasts by 4.1%-9.6%, with a higher 12-month TP at RM2.10, but keep our HOLD call unchanged.

Margin Expansion Due to Shortage of Gloves

Most of the 234% qoq improvement in net profit during the quarter was driven by cost savings (13-16% qoq drop in key raw material prices), as the ASP for the quarter remained relatively flat qoq. Under normal circumstances, manufacturers will pass on the savings to the distributors, but the recent shortage in supply has allowed manufacturers to keep most of the savings. The shortage was caused by the closure of vinyl plants in China, which are not expected to be operational any time soon.

Return on Investment in New Business Takes Time

Management has announced several strategies to increase the market share of its contact lens business. The company will be looking at several acquisition targets in Japan to further strengthen its presence and market channel, and investment in an e-commerce platform for other markets. Although SUCB has allocated around RM100m in capex for the business, the business is still in its infancy and will take at least another 3 years before it contributes meaningfully to the group, in our view.

Higher TP at RM2.10, But Stock Is Fairly Valued

We have raised our EPS forecasts for FY18-20 by 9.6%/4.4%/4.1% to incorporate better margins moving forward. We lift our TP to RM2.10, based on an unchanged 13x PER on our CY18E EPS, at a discount to the long-term industry average of 20x. Despite the improving sector dynamics, we continue to peg the stock at a discount to its peers, mainly due to the lack of a clear timeline in capacity expansion and disclosure for its contact lens division. Due to the limited upside, we are maintaining our HOLD call on the stock.

Source: Affin Hwang Research - 22 Nov 2017