Period  1Q14

Actual vs. Expectations The 1Q14 net profit of RM26.7m (-18% yoy) came in below expectations at 18% of our full-year forecast and the consensus forecasts. The negative variance from our forecast was due to lower-than-expected volume sales.

Dividends  No dividend was declared in this quarter.

Key Result Highlights QoQ, 1Q14 revenue rose by 20% to RM232m due to higher volume sales of gloves as production lines gradually commence commercial operation, which was halted due to a fire and from temporary scaling back of the automation program until full production was restored at the Alor Gajah plant. 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 while the remaining production lines were re-commissioned in various stages in 2Q14 and (ii) potential insurance claims from the damages and loss of revenue could be reflected in subsequent quarters. However, due to inventories write-down in 1Q14, pre-tax profit fell 15%. This brings PATAMI to RM26.6m (+6% QoQ) due to a lower effective tax rate.

 YoY, 1Q14 revenue fell by 28%; hit by both lower volume sales of nitrile gloves due to a fire incident at its Alor Gajah, Malacca plant leading to a loss in production output.

Outlook  Growth going forward is expected to be driven by two new plants, namely Lot 6059 and Lot 6058. However commercial productions of both plants are further delayed to 3Q14 from early 2Q14 as Supermax is awaiting the gas supply. Lot 6059 and 6058 will have 24 and 16 production lines producing 3.2b and 2.2b pieces of nitrile gloves p.a., 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.

Change to Forecasts We are downgrading our FY14E and FY15E net profits by 7% and 8% due to the deay in commissioning of the new plants and slightly lower margins, respectively.

Rating & Valuation Correspondingly, we cut our TP by 15% from RM3.80 to RM3.23. Apart from the lower earnings, the downgrade in our TP also reflects a lower 1-year forward PE rating of 14x from 15x previously. This is to account for concerns on protracted commercial production of its new plants. Maintain our OUTPERFORM call. 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. SUPERMX is trading at 12x FY14 earnings while KOSSAN is trading at 14x 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