Still on the Right Path

Supermax (SUCB) continued to report a very solid set of numbers. 9MFY18 PATAMI of RM97.2m (+57% yoy) is within our expectation but surprised consensus on the upside, constituting 75% and 79% of our respective 2018E forecasts. Similar to its peers, margin was negatively impacted by higher costs in 3QFY18, but these have been subsequently passed on. We are maintaining our BUY call with a higher TP of RM3.90 based on a 19x CY19E PER. SUCB also announced a second interim DPS of 3sen, for 9MFY18 of 6sen (3Q17: 2.5sen; 9M17: 5sen).

Some Time Lag in Cost Pass-through

The lower EBITDA margin at 17.5% in 3Q (20.5% in 2Q) led to a 7% qoq decline in PATAMI for 3QFY18. Similar to its peers, the margin for the quarter was negatively impacted by both the strengthening of the Ringgit and the higher natural-gas tariff. Nevertheless, management has indicated that they have managed to pass on the higher cost in subsequent months. We believe that Supermax will continue to benefit from the robust demand from the conversion of vinyl glove users to latex or nitrile.

Rebuilding Continues

Apart from the investment into its new contact-lens manufacturing business, management is still investing in the core rubber glove operations. The net incremental capacity growth might not be significant in 2018, as SUCB is in the process of tearing down its older, inefficient lines and replacing them with more-efficient ones. Nevertheless, there is still earnings growth, due to the cost savings from the newer lines. The total capacity growth will increase by 17% post the completion of the rebuilding exercise in 2019.

Higher TP of RM3.90, Maintain BUY

Given that the results are in line with our expectations, we are keeping our EPS forecasts unchanged; however, we are raising our TP to RM3.90 (from RM3.50) based on a 19x PER (up from 18x) now on CY19E EPS (from CY18E), still at a discount to the long-term industry average of 20x. We believe a stronger earnings growth in 4QFY18 would serve as a rerating catalyst for the stock.

Source: Affin Hwang Research - 30 May 2018