Upgrading on Undemanding Valuation

We are upgrading our call on Supermax (SUCB) from Hold to BUY on valuation grounds as the PE discount against peers has widened too much, in our view. It is currently trading at an undemanding 11.8x FY18E EPS (60% discount relative to peers). We believe that SUCB, like its peers, should continue to benefit from the ongoing glove shortage, despite the legal issue surrounding its founder. Delivery of earnings growth in FY18 will likely be the key re-rating catalyst. We raise the 12-month TP to RM3.10 based on a 17.8x CY18E PER.

Succession Planning in Place to Ease Concerns

One of the biggest investor concerns is the stability of the management team, as its founder (Stanley Thai) was recently sentenced to jail for 5 years for insider trading (the case is on appeal). The board has appointed Tan Chee Keong (nephew of Stanley) and Cecile Jaclyn Thai (daughter of Stanley) as executive directors to help ease concerns over succession planning, in our view. We believe that the concerns have been priced into the current share price, and the result of the appeal is not likely to have a further negative impact on the share price.

Benefiting From the Surge in Demand

Despite the concerns surrounding SUCB’s management team, we believe that it is business as usual for the company. SUCB, like its peers, will likely continue to benefit from the vinyl glove supply disruption in China, which should help drive SUCB’s earnings growth for FY18E. We have raised our FY18-20E earnings by 8%-11%, to factor in the better growth prospects. However, consensus is less optimistic on SUCB’s outlook, as SUCB’s annualised net profit based on 1QFY18 is 10% higher than the consensus forecast; in our view, successful delivery of earnings growth would be the key re-rating catalyst for the stock in the near term.

Upgrading to BUY With Favorable Risk-reward Profile

We have raised our TP to RM3.10 (previously RM2.10) based on a higher multiple of 17.8x CY18E PER (from 13x) at +1 stdev historical mean. Even at this higher target multiple, we believe that there is upside potential, as the stock would be trading at a 39% discount to the current sector forward PER of 29x. SUCB has traded at a 16% discount to the sector since 2010. The biggest downside risk to our investment thesis would be even weakerthan-expected demand for gloves, longer time lag on passing through the higher production cost to its customers.

Source: Affin Hwang Research - 9 Jan 2018