Supermax (SUCB) continued to report a relatively good set of results, as 1HYF19 core-PATAMI of RM69.6m (+9.1%) tracked within consensus and our expectation, delivering around 52% and 54% of our respective forecast. The 21% qoq profit growth is due to contribution from the newly commissioned replacement lines from its Perak plant. We believe that SUCB is still currently on track to deliver a stronger set of earnings in line with our expectations. Maintain BUY TP of RM2.30.

Growth Continues With Capacity Expansion

Both the growth in sales volume and the weaker RM was the main contributor to the 4.9% qoq growth in revenue for 2QFY19. We believe that earnings for 2HFY19 will remain robust, as Supermax will reap the full benefits of the newly refurbished lines. As the new lines are also more efficient, apart from revenue growth, we believe that the margin improvement is sustainable. The improvement in EBITDA margin (+1.9ppts qoq) based on the reported numbers are not substantial, negated by the A&P cost related to its contact lens operation.

Contact Lens Is Yet to be Profitable

We believe that the contract lens business is yet to be profitable, and it will take SUCB at least 2-3 years before they are able to achieve break-even. The losses mainly arise from the spending of A&P, which is needed to break into new markets. However, management has previously guided that they will not overspend on A&P to prevent the dilution of gains from the glove operation. Currently, they have allocated c. RM15m/year for A&P for the contact lens business.

Reiterate BUY With An Unchanged TP of RM2.30

We make no changes to our earnings forecast, TP unchanged of RM2.30 and BUY rating. We believe that the continued improvement in results will help to gain investor confidence in management execution capability. SUCB continues to be our preferred BUY pick for the sector and country.

Risks to Our Call

Downside risks: i) Sharp spike in the volatility in RM/US$; ii) Higher-thanexpected production costs.

Source: Affin Hwang Research - 13 Feb 2019