• Supermax (SUCB) reported yet another strong set of results, as 1HFY21 PATAMI of RM1,849m (+3,276% yoy) was above both our and consensus estimates
   
• Despite EBITDA margin declining to 70.7% in 2QFY21 from 77.9% in 1QFY21, PATAMI for 2QFY21 was still up by 34.2% qoq to RM1,059m
   
• We have raised our EPS forecasts for FY21-22E by 10-98% to factor in the latest ASP assumptions, raised our TP to RM10.90 and maintained our BUY call

Decline in EBITDA Margin as Expected

Despite the decline in EBITDA margin to 70.7% in 2QFY21 from 77.9% in 1QFY21, we are not overly concerned, as SUCB still managed to grow PATAMI by 34% qoq. The increase in operating cost was likely due to higher raw material prices and labour costs. Although revenue only increased by 47.8% qoq, we believe that price increases are more than sufficient to cover the incremental costs. The decline in margin was mainly due to a base effect. The current shortage situation has enabled manufacturers like SUCB to pass on the higher costs to its customers. As such, we are not overly concerned about the recent spike in raw material prices.

Guidance on Expansion Remains Intact

There is no change to SUCB’s expansion target for its glove production, where it targets to increase overall capacity to 36bn pcs/year from the current 26bn pcs/year or up 39% yoy. However, we believe that SUCB would continue to act rationally and could delay some of the expansion if there are signs of an oversupply in the near term to maintain overall profitability. We reckon that overall demand growth for gloves are likely to sustain at around 10-15% per year post Covid-19, supported by higher hygiene awareness and also new demand from the non-medical sectors.

Raised Our TP to RM10.90 and Reiterate BUY

We have raised our EPS forecasts for FY21E-23E by 9.7-97.7% to factor in the latest performance and also the current ASPs. Management has also guided that the highest ASPs have yet to be fully reflected in the latest results. We have raised our TP for SUCB to RM10.90 based on a lower PE multiple of 15.6x (3-year historical average) from 20.7x (+1SD), to reflect investor concerns on earnings sustainability. We believe that there is upside risk to our forecasts if the current Covid-19 situation worsens, as the current shortage will likely continue to drive ASPs higher. Downside risks include shortage of raw materials and labour.

Source: Affin Hwang Research - 2 Feb 2021