Supermax (SUCB) reported a strong set of results. 9MFY19 corePATAMI of RM104.3m (+7.3% yoy) is tracking within our and consensus estimates, delivering around 77% and 78% of respective forecasts. Although the performance for 3QFY19 was impacted by shorter working days and the negative effects from the volatility of the RM, we remain optimistic about SUCB’s outlook. We are keeping our BUY call and TP unchanged at RM2.30.

Continuing With Its Expansion

We believe that current demand is still robust and is sufficient to support SUCB’s new capacity as SUCB’s ASPs are already on the rise and sales lead times are lengthening once again, which is a good indicator of healthy demand. We are expecting a stronger FY20E, as the incremental capacity growth in FY19E is limited due to the on-going rebuilding exercise, whereby SUCB has torn down its older production lines and replaced them with more efficient lines. We expect future margin improvement with the better efficiency gained from the newer lines. Earnings were relatively weaker in 4QFY18 mainly due to forex losses.

Expanding Its Market

SUCB has yet to provide segmental numbers for its contact lens operation, which we believe has yet to turn profitable as it is still spending on A&P to penetrate new markets. Apart from obtaining the required licenses from the US and Japan, SUCB is also now expanding into China, as the company has started to secure the necessary licences. We believe that the revenue contribution is still minimal as their products are only currently sold in both the US and Malaysia. However, we believe that the losses from this division are not overly dilutive to the group’s core earnings.

Reiterate BUY With An Unchanged TP of RM2.30

We make no changes to our earnings forecasts and reiterate our BUY call with a TP of RM2.30 based on 21x CY19E PER. We believe the continued improvement will help to build investor confidence in management’s execution capability. SUCB continues to be our preferred pick in 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 - 15 May 2019