Supermax (SUCB) reported a relatively good set of results, as 1QFY19 core-PATAMI of RM31.5m (+13% yoy) is within both consensus and our expectation, delivering around 24% and 23% of our respective forecast. The strong headline PATAMI of RM35.9m (+28.8% yoy) was mainly due to a one-off gain of RM6.5m arising from an insurance claim. As we believe that SUCB is still currently on track to deliver based on our expectation, we are maintaining our BUY call and TP of RM4.60.

YoY Growth Due to New Capacity

Although the strong yoy EBITDA growth of 10.2% was due to commissioning of new capacity in 2QFY18, we believe that SUCB would still be able to achieve yoy profit growth in 2QFY19E as there was incremental capacity growth of around 3-5% or 1.35bn gloves from the rebuilt plant in Perak, which was only fully operational by end-September 2018. We believe that the new plant will not only generate revenue growth, but also some margin expansion as the new plant is more efficient than the previous ones. Overall capacity target remains unchanged at 29bn/pcs in mid-2020 from the current 24bn/pcs.

Positive Progress on Its Contact Lens Division

SUCB has shipped the first batch of contact lenses to Japan in August, and also launch its brand, Aveo locally in Malaysia. While management has not disclosed the financials for the contact lens division, we believe the segment is still operating at a loss due to the advertising and marketing expenses incurred to expand into new markets. We are expecting the new business division to only break-even by FY2022, but the losses are still manageable and would not significantly dilute the profit growth of the glove business.

Reiterate BUY With An Unchanged TP of RM 4.60

We believe the latest reported numbers by SUCB would help ease investor concern on management execution capability after the relatively weak 4QFY18 set of results. We reiterate our BUY call on the stock with a TP of RM4.60 based on 21x CY19E EPS.

Risks to our call

Downside risks: i) Stronger RM/US$; ii) Higher-than-expected production costs.

Source: Affin Hwang Research - 2 Nov 2018