Period  4Q13/FY13

Actual vs. Expectations The FY13 net profit of RM128m (+6% yoy) came in slightly below expectations at 90% and 93% of our and the consensus full-year net profit forecasts respectively. The negative variance from our forecast was due to an unexpected fire at its Alor Gajah plant leading to a temporary loss of production output.

Dividends  A final dividend of 3.0 sen was proposed. This brings its FY13 total dividend to 5.5 sen which is in line with Supermax’s 30% dividend payout policy.

Key Results Highlights QoQ, 4Q13 revenue fell by 32% to RM192m; hit by both lower volume sales and average selling price (ASP) of nitrile gloves. The lower volume sales were due to a fire incident at its Alor Gajah, Malacca plant leading to a loss in production output. However, we are not perturbed by this temporary loss of production. Looking ahead, we are also not overly concerned about earnings growth going forward because: (i) 50% of the production lines impacted by the fire are now up and running since mid-Jan 2014 and while the remaining production lines are expected to commence by end-Mar 2014 and (ii) potential insurance claims from the damages and loss of revenue could be reflected in subsequent quarters. The lower ASPs were due to lower input raw material prices.

 However, PBT fell at a slower rate than turnover by only 6% to RM38m thanks to margin expansion emanating from lower input raw material prices as well as better production efficiencies from increasing usage of automation. As a result, PBT margin rose 5.6 ppts to 19.8% from 14.2% in 3Q13. This quarter marked the third second consecutive quarter of margins improvement. However, 4Q13 net profit of RM25m (-30% QoQ) was hit by an abnormally higher effective tax rate.

 YoY, FY13 revenue rose 13% to RM1.1b on the back of new capacity from the new and refurbished lines from Lot 6070. Similarly, FY13 net profit rose 6% to RM128m.

Outlook  Growth going forward is expected to be driven by two new plants, namely Lot 6059 and Lot 6058, which are on track to commission commercial productions by end 1Q14 or early 2Q14. 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.

Change to Forecasts We are downgrading our FY14 and FY15 net profit by 7% and 8% due to the temporary loss of production capacity and slightly lower margins, respectively.

Rating and Valuation Maintain our OUTPERFORM call. However, we are raising our TP by 9% from RM3.52 to RM3.80 as we roll forward our 12-month TP valuation from 15x FY14 EPS to 15x revised FY15 EPS.

 Since our upgrade report in Feb 2013, the stock has risen by 35%. We continue to like the stock for its 30% discount to peers as well as being a beneficiary of the weakening Ringgit against the USD as it does not hedge its US dollar receipts. Since our upgrade report in Feb 2013, the stock has risen by 43%. SUPERMX is trading at 13x FY14 earnings while KOSSAN is trading at 16x 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.

Risks to Our Call  Slower-than-expected commissioning of new plants.

Source: Kenanga