We hosted a conference call with Supermax’s management with more than 20 investors and came back feeling optimistic about the outlook for the company and the sector. We believe that Supermax will benefit from the surge of COVID-19 cases in the American market, as close to 50% of its sales are catered towards the region. Margins for its own distributed gloves are also superior, as the company eliminates the middle man and benefits from current market prices. We upgrade our EPS forecast by 28%-73% for FY21- 22E and raise our TP to RM13.90 from RM9.00. Reiterate BUY.

Benefiting From the Resurgence of COVID-19 in US

We believe that Supermax could benefit from the resurgence of COVID-19 in the US, as 50% of its sales are catered towards the region. As 95% of SUCB products are sold through its own distribution channels or independent distributors, the company is not constrained by pricing agreements and is able to sell its product at current market rates. In addition, SUCB is also able to generate higher margins, as it sells directly to the end users. With new COVID-19 cases still on the rise, we expect selling prices to increase by another 20-25% from June until end of the year, supporting earnings growth.

Too Early to Worry About Overcapacity

We are not overly concerned over demand for rubber gloves post COVID- 19, as we believe most of the current orders are for genuine consumption rather than inventory building given current robust spot orders. Although there are also some players which recently announced aggressive expansion plans, we believe these players would start to act rationally again when selling prices normalise. We believe that overall demand for rubber gloves would increase post COVID-19 relative to 2019, as we are expecting a change in consumption patterns, as medical practitioners start to consume more medical gloves to reduce risk of contamination.

Maintain BUY With Higher TP of RM13.90

We raise our EPS forecast by 28%-73% for FY21E-22E, to factor in a higher margin assumption (due to the higher selling price). We have also lifted our TP to RM13.90, based on an unchanged 33x CY21E PER on the back of the earnings upgrade. Key downside risk: 1) sharp movement in raw-material prices, and 2) sudden movement of US$ against RM.

Source: Affin Hwang Research - 9 Jul 2020