We came back from a visit to Supermax Corporation (SUPERMX) feeling optimistic that its new gloves' capacity expansion plans for FY14 are on track. We understand that the new plants are expected to commence commercial operations end 1Q14. We believe that SUPERMX is positioned to conservatively deliver mid-teens growths over the next two years underpin by capacity expansion. More importantly, SUPERMX is expected to be further re-rated as the re-emergence of EPF as a substantial shareholder lends credibility to the stock. As such, we are raising our TP by 15% from RM3.06 to RM3.52 on a higher PER valuation of 15x FY14 EPS (from 12x). The targeted PER is at +1.5SD level above the 5-year historical average. SUPERMX is trading at 12x FY14 earnings while one of its peers KOSSAN is trading at 15x FY14 earnings. We believe the valuation gap should narrow considering that SUPERMX’s capacity and net profits are at levels similar to KOSSAN. Reiterate OUTPERFORM. SUPERMX remains our Top Pick for the sector.

Two new plants to drive growth going forward. The two plants namely Lot 6059 and Lot 6058 are on track to commission commercial productions in 1Q14. Lot 6059 and 6058 will have 24 and 16 production lines producing 3.2b and 2.2b pieces of nitrile gloves, respectively, bringing the total nitrile production capacity from 6.9b (including the 1.4bn in Lot 6070) to 12.3b pieces p.a. or 52% of the total installed capacity. Given the strong demand for nitrile gloves, SUPERMX is currently facing a two-month oversold position.

Big plans for Glove City and SUPERMX Business Park. During the visit, SUPERMX outlined its plans for both Glove City and its recently acquired land in Serendah, otherwise known as SUPERMX Business Park. The expansion at both sites will cost a total of RM1.3b over an 11-year period. The first phase of Glove City, comprising six large plants with a total capacity of 24.6b pieces, is expected to commence in 1H15 after Lot 6058 and Lot 6059 are fully commissioned with an estimated CAPEX of RM95m. Key infrastructures, including water and natural gas, are now in place, which was the main reason for the delays in the past. We understand that Glove City’s 36-acre land located in Bukit Kapar was purchased for RM18m (RM11psf) which is fair considering that industrial lands in the area are priced around RM16psf. Concurrently, the recently acquired 100-acre land in Serendah (SUPERMX Business Park) is expected to be developed in 2H14. To recap, 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 (IGMC). The project will be spread over two phases over nine years whereby the first phase is scheduled to commence in 2014-2018 comprising 28 production lines (production capacity of 10.9b p.a.) and the second phase is scheduled to begin in 2019-2022 comprising 12 production lines (production capacity of 4.7b p.a.). CAPEX for IGMC’s first phase is expected to be RM70m. We understand that the remaining 40% of the land has been earmarked for property development, which targets the gloves' manufacturing support businesses and with an estimated GDV of RM350m-RM400m. For illustrative purposes, assuming a conservative pre-tax margin of 25% (net: 19%), the project would generate a total net profit of RM66-75m over a 5-year period. We are not overly concerned with funding considering that SUPERMX has a net gearing of 12% as at 30 Sept 2013 and operating cashflow which we forecast will average RM115m p.a. Additionally profits gained from sale of the factories built for the supporting businesses can be ploughed back into the CAPEX for IGMC.

We continue to like the stock for its 23% discount to its peers as well as being a beneficiary of the weakening Ringgit against the USD as it does not hedge its US dollar receipts. The share price performance of SUPERMX has lagged its peers such as Kossan and Hartalega. SUPERMX’s YTD 2013 share price performance (+43%) is still lagging other players such as KOSSAN (+148%) and HARTALEGA (+53%). We believe the re-emergence of EPF as a substantial shareholder of SUPERMAX lends credibility to the stock. Since our upgrade report in Feb 2013, the stock has risen by 43%. SUPERMX is trading at 12x FY14 earnings while KOSSAN is trading at 15x FY14 earnings. We believe the valuation gap should narrow considering that SUPERMX’s capacity and net profits are at levels similar to KOSSAN.

Source: Kenanga