Result

• Supermax reported a quarterly net profit of RM19.8mil for its 3QFY17 (quarter ended March 31, 2017). The quarterly net profit was flat y-o-y, +0.4% despite achieving much higher revenue of 37%. Meanwhile, the quarterly net earnings declined by 12.6% q-o-q although revenue increased by 30.2% q-o-q.

• Below expectations. For 9MFY17, net profit was reported at RM61.9mil, which was below ours and consensus expectations by meeting only 57.4% and 57% of the full year estimates respectively.

Comment

• Higher ASP. The Group’s 3QFY17 revenue surged 37% y-o-y to RM308.2mil, mainly due to higher average selling prices in conjunction with the increased in raw material prices as well as stronger USD against MYR. However, net profit grew slightly by 0.4% y-o-y, which we believe was due to the higher raw material prices. The operating profit margin narrowed by 9.1pts y-o-y to 6.5% from 15.6% mainly due to higher cost owing to sharply-rising raw material prices and start-ups costs for the new contact lens product.

• Disappointing earnings on quarterly basis. As compared to the 2QFY17, 3QFY17 revenue surged by 30.2%, on the back of increased output from refurbishment works carried out, higher ASP and stronger USD vs the Ringgit. However, net profit recorded a decline of 12.6% q-o-q attributable to higher raw material prices and the pre-operating costs incurred. The positive of weakening Ringgit could not mitigate the adverse impact of rising raw material costs during the quarter whereby natural rubber latex prices rose above RM6.00/kg amid the wintering season for rubber trees in the region. In addition, price of synthetic nitrile latex rose sharply by 30% from USD1031/mtw in Q4’16 to USD1338/mtw during Q1’17. As a result, the PBT margin narrowed by 4.6pts q-o-q.

• Additional expenses in the next 12 months. In regards to the new venture in contact lens, the Group has started to incur the pre-operating costs on the start-ups in overseas as well as advertising and promotional costs. Additional expenses were also being incurred in order to gain a greater market share in global contact lens market. Thus, we reckon that the Group will face a limited earnings growth moving forward.

• Dividend declared. The Group has declared a 2.5 sen single tier interim dividend which will go ex on 5th July 2017 and to be paid on 28 July 2017.

Earnings Outlook/Revision

• We slash our earnings forecast for FY17F and FY18F by 23.3% and 28.9% respectively to account for the additional expenses that will be incurred in the next 12 months.

Valuation & Recommendation

• Downgraded to SELL with a lower target price of RM1.76 (previous target price: RM2.07) following our earnings cut. We derived our TP by pegging at 14x FY18F EPS which is close to its 3-year mean PE.

• We believe the Group’s bottomline would be less exciting as affected by the raw material price, which leads to higher operating cost. Furthermore, we foresee the additional costs in relation to the new start-ups would whittle the Group’s margin. Thus, we envisage the Group to face headwinds moving forward.

Source: JF Apex Securities Research - 31 May 2017