18M16 net profit of RM153.4m missed our expectation by 12% due to one-off tax incurred in 6Q16 in respect of prior year assessments (note the change in financial year-end from Dec to June; hence 18-month to FY Jun 16). At pre-tax profit level, the results came in within our expectation. We conservatively lowered our TP from RM3.20 to RM2.83 based on 13x FY17E EPS (at +0.5 SD above its historical forward average) as we take into account the slower-thanexpected contribution from its contact lens business.

Key Result Highlights

QoQ, 6Q16 revenue rose 19% due to: (i) stronger volume sales (10.4%) arising from overseas distribution subsidiaries and in line with the re-commissioning of some production lines, which were shut down for upgrading and maintenance in Perak, and (ii) higher ASPs (+7.5%) in line with higher raw materials despite intensifying price competition. Despite higher ASPs, PBT margin was lower by 1.9ppts to 13.0% from 14.9% in 5Q16. This brings 6Q16 pre-tax profit to RM34.5m (+4% QoQ). However, PATAMI came in at RM6.8m (-66% QoQ) no thanks to a higher effective tax rate of 80% due to additional tax paid in respect of previous years’ assessments and provision for deferred tax. A second interim single-tier DPS of 2.0 sen was declared for the quarter. This brings 16M16 DPS to 8.0 sen.

This brings cumulative 16M16 revenue and net profit to RM1.54b and RM153.4m, respectively; achieved on the back of a stronger USD coupled with increased capacity output from new and refurbished production lines as well as a better sales mix with stronger nitrile glove sales that commanded higher margin.

Outlook. We understand that the one-of tax paid is not expected to recur in subsequent quarters. As such, we expect normalised profit of between RM33m to RM35m per quarter going forward. Despite intense price competition, Supermax managed to raise sequential ASPs partly due to its OBM model. Growth going forward, eranings growth is expected to be driven by two new plants, namely Plant #10 and Plant #11 i.e. Lot 6059 and 6058 in Meru, Klang. These two plants are expected to ramp up capacity by 32% to 23.2b pieces by 3QCY16, catering entirely to producing nitrile gloves, and have started commissioning and are presently running 8 double former lines equivalent to 2.2b pieces (installed capacity rose 12% to 19.8b pieces as at 31 Dec 2015). The remaining balance of 3.4b pieces capacity is expected to be commercially ready over the next six to twelve months.

Maintain OUTPERFORM. No changes to our FY17E earnings. However, we conservatively lowered our TP from RM3.20 to RM2.83 based on 13x FY17E EPS (at +0.5 SD above its historical forward average). Our PER is cut from 15x to 13x as we take as we take into account the slower-than-expected contribution from its contact lens business. We like Supermax for: (i) volume growth from gradual ramp-up of new plants to provide earnings growth over the next two years, (ii) steep 40% discount to the sector average, and (iii) it is not just purely a rubber gloves play, but it may potentially see recurring earnings stream from its venture into contact lens manufacturing.

Source: Kenanga Research - 30 Aug 2016