Supermax’s (SUCB) FY18 results were below expectations. FY18 net profit of RM107m (+59% yoy) accounts only for 82-83% of our and consensus forecasts mainly due to weaker-than-expected 4QFY18 results. 4QFY18 revenue was flat (+1% qoq), but operating costs was significantly higher (+9% qoq) on the back of higher operating costs which SUCB was unable to pass on fully. This resulted in lower EBITDA margin of 11% in 4QFY18 (3QFY18: 18%). We fine-tune our FY19E-20E forecasts and introduce FY21E forecasts. We maintain our BUY call with an unchanged TP of RM4.60 based on a 21x CY19E PER. SUCB also proposed final DPS of 2sen, for FY18 of 11sen (FY17: 5.5sen).

FY18 Net Profit of RM107m, Below Expectations

SUCB posted FY18 revenue of RM1.3bn, higher by 15.8% yoy mainly due to capacity increases from its 2 newest plants, while net profit increased by 59.3% yoy to RM107m. However, net profit was below expectations, accounting only for 82-83% of our and consensus forecasts due to weakerthan-expected 4Q results. EBITDA margin improved to 16.6% in FY18 leveraging on improved efficiency and economy of scale. Despite the weaker set of results, SUCB proposed a final DPS of 2sen, bringing FY18 DPS to 11sen (FY17: 5.5sen) which is higher than our and consensus DPS forecast of 9sen and 7sen, respectively. Separately, SUCB has also proposed a 1:1 bonus issue.

Lag in Cost Pass-through

On a qoq basis, EBITDA margin was lower at 10.9% in 4Q (17.5% in 3Q) led to a 70.5% qoq decline in PATAMI for 4QFY18. Operating costs was higher by 8.8% on the back of higher production costs from higher raw materials costs for nitrile, natural gas price hike and higher staff cost (+15% qoq) which SUCB was not able to pass on fully. Nevertheless, we believe that SUCB will continue to benefit from the robust demand from the conversion of vinyl glove users to latex or nitrile, which should allow it to fully pass through the costs subsequently.

Maintain BUY and TP of RM4.60

We fine-tuned our FY19E-20E forecasts and introduce our FY21E forecasts. We maintain our BUY rating on the stock with an unchanged TP of RM4.60 based on 21x CY19E EPS. Key downside risks include i) weaker RM/US$; ii) weaker-than-expected demand for gloves; iii) higher production costs; and iv) longer time lag passing through the higher production cost to its customers.

Source: Affin Hwang Research - 30 Aug 2018