Supermax (SUCB) reported a strong set of results - 9MFY20 PATAMI of RM126m (+21% yoy) is above both our and consensus estimates, delivering 91% and 85% of our respective forecasts. The strongerthan-expected performance was mainly driven by higher selling prices due to the shortage of rubber gloves, in our view. As there is limited new capacity coming on stream for the next few quarters, we believe that SUCB still has room to raise selling prices. As such, we are raising our EPS forecasts by 27%-61% for FY20-21E, and raising our TP to RM5.40. Upgrade to BUY from HOLD.

COVID-19 Helped Drive Profit

SUCB was able to deliver a strong earnings growth for 3QFY20, as PATAMI for the quarter grew by >100% both qoq and yoy. We believe that the strong performance is mainly driven by higher ASPs, as the shortage of gloves has given SUCB the flexibility to increase selling prices. EBIT margin improved to 21.1% in 3QFY20 from 14.5% in 3QFY19. SUCB also benefited from a higher distribution margin; unlike its peers which mainly sell to distributors, SUCB also deals directly with healthcare providers, for which we had previously underestimated the margin enhancement.

Just the Beginning

We believe that there is still room to raise selling prices, as we are only expecting the overall sector to increase capacity by around 10% for 2020. Given that the outbreak has only become a serious problem starting from 2Q20, demand is likely to remain robust in the coming quarters. Hence the current margin is no doubt sustainable, in our opinion. Apart from benefiting from the price increases, SUCB would also benefit from the full contribution of Plant #12A, which was fully commissioned recently. Plant #12A has added around 2.2bn capacity (~10%) to its existing 22bn capacity.

Upgrading to BUY With Higher TP of RM5.40

We are increasing our EPS forecasts by 27%-61% for FY20-22E, to factor in a higher margin assumption (and selling price). We are also raising our TP to RM5.40, based on an unchanged 33x CY21 PER on the back of the earnings upgrade. Apart from the price increases, SUCB would also benefit from a weaker Ringgit. Key downside risk to our call: 1) sharp movement in rawmaterial prices, and 2) sudden movement of US$ against MYR.

Source: Affin Hwang Research - 22 May 2020