• Supermax reported a strong set of numbers, with 1Q FY21 PATAMI of RM789.5m (+>30x) above both our and consensus expectations, comprising 42% and 41% of respective full-year forecasts
• The increase was driven by the strong ASPs in the quarter, which boosted SUCB’s PBT margin to 77.6% from 8.8% a year ago
• Given that the current COVID-19 is still on a rising trend, we are increasing our ASP assumptions and hence our FY21-23E EPS by 50.4-61.7%. Our TP however remains relatively unchanged as we are lowering our target PER multiple

Business Is Still Good

Management guided that the current quarter earnings is not their best quarter yet, as ASP for the upcoming quarter is still higher than the current quarter. Although management did not provide a clear guidance on ASPs, we believe that blended ASPs can continue to increase by 4-5% mom in FY21E, before remaining stagnant in FY22E. As Plant 12B is already near completion, this would add another 4-5% of additional capacity by the end of 1Q FY21E. The new capacity will focus on nitrile gloves, but we believe that not all the capacity will be able to produce nitrile gloves, given the current shortage of raw materials. However, there should be limited impact to margins, as there has been a likewise recent surge in ASPs for powdered-free latex gloves.

Leveraging on Its Current Network

Interestingly, management has unveiled its ambition to venture into glove manufacturing in both the US and UK, as they try to leverage on the client base they acquired recently. While the scale of the expansion is still small relative to its Malaysian operations, SUCB is earmarking a total investment of around USD650m for the new plants. The new plants will supply directly to government agencies, similar to the business strategy SUCB has for its face-mask manufacturing in Canada. Management believes that demand for those glove manufactured in those countries will be stable, as those governments would want to reduce dependency from foreign imports and maintain a strategic reserve.

Reaffirming Our BUY Call With a Slightly Lower TP of RM16.40

We are raising our FY21-23E EPS by 50-62% to factor in our higher ASP assumption, due to the ASP achieved in current quarter. However, we are trimming our 12-month TP to RM16.40 (previously RM16.50) based on a lower PER of 21x (+1SD of pre-COVID-19 historical mean) from 33x applied to our CY21E EPS, as we believe that sentiment in the sector could be weaker due to news flow on the availability of vaccines. Downside risks: a shortage of raw material and unexpected disruption of its manufacturing facilities.

Source: Affin Hwang Research - 28 Oct 2020