1Q17 net profit of RM19.5m (>+100% QoQ; -49% YoY) came in below expectations at 13% and 14% of our and consensus full-year net profit forecasts, respectively. We downgrade our FY17E and FY18E net profits by 8% each to take into account the higher-than-expected expenses incurred from its contact lens business. We lowered our TP from RM2.83 to RM2.60 based on unchanged 13x FY17E EPS (at +0.5 SD above its historical forward average) as we take into account the higher-than-expected expenses incurred from its contact lens business.

QoQ, 1Q17 revenue rose 0.9% due to: (i) stronger volume sales (+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 but offset by (ii) lower ASPs (-4%). Overall profitability was dragged down by higher minimum wages, natural gas price and incurred additional costs for its contact lens division in terms of advertising and promotion expenses. As a result, PBT margin was lower by 3.2ppts to 9.8% from 13.0% in 6Q16 (previous quarter due to change in FYE from Jun to Dec). This brings 1Q17 pre-tax profit to RM26.5m (-23% QoQ). However, PATAMI came in at RM19.5m (>+100% QoQ) as effective tax rate normalised to 25% compared to 80% in 6Q16 (due to additional tax paid in respect of previous years’ assessments and provision for deferred tax). A final single-tier DPS of 2.0 sen was declared for FYE16. This brings 16M16 (FYE17) DPS to 8.0 sen which is within our expectation.

YoY, 1Q17 revenue fell 13% due to lower volume sales (-1.3%) and ASPs (-12%). Overall profitability was dragged down by higher minimum wages, natural gas price and additional costs for its contact lens division in terms of advertising and promotion expenses. As a result, PBT margin was lower by 6.1ppts to 9.8% from 15.6% in 6Q16 (previous quarter due to change in FYE from Jun to Dec).

Outlook. Despite intense price competition, Supermax managed to raise sequential ASPs partly due to its OBM model. Growth going forward, earnings 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. We downgrade our FY17E and FY18E net profits by 8% each to take into account the higher-than- expected expenses incurred from its contact lens business. Correspondingly, we lowered our TP from RM2.83 to RM2.60 based on unchanged 13x FY17E EPS (at +0.5 SD above its historical forward average).

Source: Kenanga Research - 30 Nov 2016