1Q18 net profit of RM27.9m (+43% YoY) came in within expectations at 27% of our and consensus full-year forecasts. We are keeping our FY18E earnings forecast in anticipation of volatile subsequent quarterly earnings due to erratic tax expenses. Following the recent share price run-up and poor visibility in terms of forward looking guidance, we downgrade our MARKET PERFORM rating to UNDERPERFORM. TP is RM1.70 based on unchanged 12x FY18E EPS.

1Q18 within expectations. 1Q18 net profit of RM27.9m (+43% YoY) came in within expectations at 27% of both our and consensus full-year forecasts. No dividend was declared in this quarter as expected.

Key Result Highlights. QoQ, 1Q18 revenue came in flat at RM312m (-0.2% QoQ) due to lower volume sales but more than offset by higher ASPs. There was no guidance in terms of actual volume sales and ASPs growth in their results commentary. 1Q18 PBT rose 13% as PBT margin expanded by 1.5pp to 13% due to lower input raw material prices and efficiencies gain from efforts taken to improved efficiency and productivity. However, due to a lower effective tax rate of 31% compared to 67% in 4Q17, 1Q18 PATAMI rose two-fold to RM27.9m due to low base effect in 4Q17. Judging by the past eight quarterly results, the tax rates are expected to remain volatile going forward.

YoY, 1Q18 PATAMI of RM27.9m (+43% YoY) came in within expectations, at 27% of our/consensus full-year forecasts. This was achieved due to higher revenue (+16%) underpinned by higher output achieved from refurbishment work, higher average selling prices in response to increased raw material prices as well as a stronger USD vs Ringgit. Profitability has improved on efforts taken to improve efficiency and productivity, including the refurbishment of the older lines and streamlining of work processes. As a result, 1Q18 PBT margin was higher by 3.2pp to 13% from 9.8% in 1Q17.

Outlook. There was no guidance in terms of new capacity expansion, volume sales and ASPs in the results commentary and details were also scant in terms of the outlook. Looking ahead, pre-operating costs incurred on new start-ups overseas as well as advertising & promotional costs incurred in launching new contact lens products overseas could potentially erode margin. In terms of outlook for gloves, the Chinese Government’s concerted efforts to clamp down on highly polluting nature of vinyl glove plants that have exacerbated China’s polluted environment has proven to be a boon for the natural rubber and nitrile glove producers as demand has shifted to them.

Downgrade from MARKET PERFORM to UNDERPERFORM. Following the recent share price run-up coupled with poor earnings visibility in terms of forward looking guidance, we downgrade our MARKET PERFORM rating to UNDERPERFORM. TP is RM1.70 based on unchanged 12x FY18E EPS (at +0.5 SD above its historical forward average). The stock has been traded at steep discount of 30- 50% compared the sector average due to its weak visibility and minimal disclosures and guidance. The fast appreciating MYR against the US Dollar is a bane to Supermax as it does not hedge its US dollar receipts.

Key risks to our call. Higher-than-expected volume sales and lowerthan-expected tax rate.

Source: Kenanga Research - 22 Nov 2017