Supermax’s (SUCB) reported a FY19 core PATAMI of RM119.3m (+12% yoy) that fell short of both the consensus and our forecast, delivering only 90% and 88% of the respective forecasts. The miss was due to weak 4QFY19 results, in which core PATAMI contracted by 56% qoq to RM15.1m. The margin compression during 4QFY19 was due to a sharp spike in raw material costs. As such, we lowered our EPS forecasts for FY20-21 by 10% and cut our 12-month TP to RM1.90, but maintain our BUY call.

Growth Strategy Remains Unchanged

Despite the hiccups in 4QFY19, management commented that it is continuing with the capacity expansion, as Plant #12 is in the midst of completion and expected to start contributing by year-end. The recently acquired land in Meru, Klang would be used to build 3 plants (#13, #14, #15) which management hopes will grow SUCB’s capacity by 60% to 44bn/pcs over the next 5 years. However, we have taken a more conservative approach, as we are forecasting a net incremental capacity at a 7-9% CAGR for the next 3 years. We believe some of the new lines will be used to replace older and less efficient production lines.

Similar Problem Across the Industry

Management mentioned that the margin contraction during the quarter was due to the increase in raw material costs, as latex prices were up by 23% qoq in 4QFY19. We believe that some of the main challenges limiting the glove makers’ ability to raise their selling price are the value perception of latex gloves and nitrile gloves, overcapacity in the latex glove space and the time lag in price setting. We believe that other glove makers with high exposure in the latex glove segment are facing similar problems. We expect the ASP of latex glove to be revised up gradually in the coming months to compensate for the higher cost.

Maintain BUY With a Lower TP of RM1.90

We lower our FY20E-21E EPS by 10% to factor in lower margins, and cut our TP to RM1.90 based on a lower PER target of 18x (previous: 21x) as we now see milder growth, on the CY20E EPS (rolled forward from FY20E). Nonetheless, we keep our BUY rating on the 28% upside potential and 12% yoy earnings growth for FY2020E. Downside risks: i) sharp spike in the volatility of the RM/US$; and ii) higher-than-expected production costs.

Source: Affin Hwang Research - 3 Sept 2019