Supermax’s (SUCB) 1HFY20 performance was within our expectations but fell short of consensus, as 1HFY20 PATAMI of RM54.9m (-21.1% yoy) only constituted 45% and 42% of our and the street’s forecasts respectively. The lower 1HFY20 earnings were due to labour issues impacting its productivity since 1QFY20, which is being resolved. We believe that the qoq earnings improvement is a good indicator that the situation has improved, and new capacity has started coming on stream gradually. We raise our EPS forecasts by 1.4-2.9% for FY20-21E, and our TP to RM2.00. Maintain our BUY call.

Labour Shortage Eases, Expansion to Continue

As the labour shortage situation improves, SUCB was able to commission 5 (from 3 in 1Q) of the 8 lines in the new Plant #12A, with the remaining lines to be commissioned by end of the quarter. The completion of Plant #12A will add around 2.2bn pcs (+10%) to its current capacity of around 22bn pcs. Plant #12B, which is slated to be fully completed by end of 2020, would increase its capacity by another 2.2bn pcs. Earnings growth will likely grow in tandem with the new expansion, in our view. SUCB is currently engaging with its agent to secure enough workers for its expansion.

Stronger Demand Ahead

Management has guided that they are putting the upgrading works on Lot 38 on hold, due to the recent surge in demand for gloves as Covid-19 worsens. As such, we are also revising higher our EPS forecast, to factor in the additional capacity available for 3QFY20. We believe that the demand for Malaysian gloves has started to improve since October 2019, as buying patterns from the US have normalised since tariffs were imposed on China-produced gloves. The higher demand from Covid-19 also gives SUCB more flexibility in determining their selling prices, which is likely to lead to better margins. SUCB guided that the lead time has already stretched to 4 months.

Reiterate BUY With a Higher TP at RM2.00

Despite only increasing our EPS forecasts by 1.4-2.9% for FY20-21, to factor in stronger demand from Covid-19, we are raising our TP to RM2.00 based on a higher target PE multiple of 21x on CY20E EPS (+1SD from mean – from RM1.70 on 18x). We believe that SUCB’s valuation would likely re-rate, SUCB is also a beneficiary of a weaker Ringgit, and its earnings are not dependent on domestic consumption; as such we reiterate our BUY call.

Source: Affin Hwang Research - 26 Feb 2020