News  In an announcement to Bursa Malaysia, Supermax Corporation (SUPERMX)’s wholly-owned Maxwell Glove Manufacturing Berhad has entered into an agreement with Dragonline Resources Sdn Bhd to buy a piece of land measuring 40.47 hectares (approximately 100 acres) located in Mukim Serendah, Daerah Ulu Selangor for RM78.4m.

 The acquisition is expected to be completed within three months from the date of signing the SPA.

Comments  This land acquisition came as a surprise to us as earlier there was already a planned Glove City project. To recap, SUPERMX has plans to set up new factories in Bukit Kapar, Klang in a development called Glove City. Supposed to start in 2011, the project has yet to take off. SUPERMX had planned to progressively transfer all its rubber gloves production to this project to enhance operating efficiency. This ‘glove city’ would have its own independent electricity generator, together with a mix of natural gas and bio-fuel facilities.

 Hence with this latest land acquisition, we do not discount the possibility of Glove City being replaced with this latest new project.

 We understand that this piece of land would allow SUPERMX to embark on its long-term expansion plan to expand its gloves capacity to meet the rising demand for nitrile gloves, including medical, dental examination and surgical types; the demand catalysts being a growing global population, increase in healthcare reforms and rising affluence in developing countries and widening applications for nitrile gloves beyond traditional uses.

 The land acquisition will be funded via internally generated funds and borrowings. For illustrative purposes, assuming 100% financing via debt, this acquisition will raise SUPERMX’s net debt and net gearing from RM118m to RM195m and 0.12x to 0.21x, respectively, as at 30 June 2013. However, with its operating cash-flow estimated at RM121m p.a. over FY13 and FY14, this acquisition could be easily funded.

 Salient points of the project are: (i) the project will be located at the new site measuring 100 acres of which 60 acres will be utilised for an integrated glove manufacturing complex, which will be named “Supermax Business Park”; and (ii) the remaining balance 40 acres will be opened to the glove manufacturing’s supporting industries such as chemical, printing and packaging suppliers, engineering and automation companies, logistics services providers and porcelain/ceramic former manufacturers, to set up their operations here.

 Currently, details are scarce as to how many plants, number of lines and timeline for the commencement and completion of the project. We understand details will only be furnished in its next briefing of which no dates were given yet.

 For illustrative purposes, based on our back-of-the-envelope calculations, the allocated 60 acres for a manufacturing complex are expected to produce 40b pieces of gloves (73% higher compared to 23b pieces upon completion of Lot 6059 and Lot 6058 in 2014) by extrapolating the earlier Glove City’s estimate of 36 acres yielding 24b pieces of gloves.

Rating  Maintain OUTPERFORM with a TP of RM2.82 based on 12x FY14 EPS (The targeted PER is at +1.0SD level above the 5-year historical average).

Risk to Our Call  Delay in the commercial production of Lot 6059 and Lot 6058.

Source: Kenanga