Following a long hiatus, SUPERMX recently organised a small group briefing comprising sell-side analysts. Although we are positive on its plans to rebuild and replace old factories with new, high efficient production lines, we are cautious on SUPERMX’s production schedule punctuality given past protracted delays. We reiterate our UNDERPERFORM call. Following our earnings upgrade, TP is raised from RM1.95 to RM2.20 based on unchanged 12x FY19E revised EPS.

Capacity expansion focusing on rebuilding and replacement of old factories and lines. Following the completion of plant 10 (2.2b pieces) and 11 (3.4b pieces) in end 2017, the group’s installed capacity rose 30% to 23b pieces from 17.8b which is expected to drive growth in FY18 and FY19. In a bid to circumvent constant production delays due to water infrastructure issues, the group is undertaking a strategy focusing on rebuilding and replacement of old factories with new, high efficiency production lines with speed up to 38k-40k (compared to 18k per line per hour) pieces of gloves per hour per line. The capacity plans outlined are; (i) decommissioning old lines in Block G (Kamunting, Taiping) and replace them with new ones (expected to increase from 1.02b to 1.35b pieces per annum), (ii) convert unused warehouse in Block F (Kamunting, Taiping) (new capacity 2b pieces), iii) decommissioned old lines at Sungai Buloh plant from 12 to 20 lines (capacity increase 97% to 2.4b pieces), and (iv) to build plant 12 behind the existing factory in Meru Klang i.e Plant 10 and 11. The estimated capex of RM300m is expected to be spread over FY18 and FY19 of which we have factored into our earnings model. Upon full commercial production in stages from 3Q 2018 till end 2H 2019, installed capacity will rise 16% to 27.2b pieces per annum.

Expansion growth beyond year 2020. SUPERMX outlined longer-term plans for Glove City (Bukit Kapar), Serendah (SUPERMX Business Park) and decommissioning of biomass-fired plant in Lahat. The Glove City, initially comprising four plants is likely to be scaled down since it has to surrender about one-third of land to the Government for the West Coast Highway. There could be potentially gains from this compulsory acquisition considering that the land was bought back at RM11 per sq ft. As such, the group has to resubmit plans for the plant. The 100-acre land in Serendah is expected to be sub-divided whereby 60% is earmarked for gloves manufacturing support businesses and factories. The remaining 40% is for expansion of new glove manufacturing plants. We are not overly concerned with funding considering that SUPERMX has a net gearing of 23% as at 31 Dec 2017 and operating cashflow which we forecast will average at RM150m. Additionally, profits gained from sale of the factories built for the supporting businesses can be ploughed back into the capex for Glove City.

Contact lens venture cashflow positive but loss-making. The contact lens business is presently loss-making but losses has narrowed from initial pre-operating stages at RM7-9m to presently between RM2m to RM4m per annum but is cashflow positive and only expected to be profitable over the next two years. Interestingly SUPERMX has managed to ramp up contact lens production from 40m pieces to 70m pieces presently. We were not guided in terms of ASPs, volume and margins for the business. However, cursory check on listed manufacturers like Cooper Vision (subsidiary of Cooper Companies, a global medical device company) revealed that gross margin for the business ranges between 57% and 65%.

Upgrade FY18E/FY19E net profit by 13%/13% to take into account higher volume sales from the new capacity expansion.

Reiterate UNDERPERFORM. Correspondingly our TP is raised from RM1.95 to RM2.20 based on unchanged 12x FY19E revised EPS (at +0.5 SD above its historical forward average). The group has been traded at steep discount of 50% compared to the sector average due to its weak earnings guidance and it trails behind peers in terms of capacity expansion and innovation. Key upside risks to our call are faster-than-expected volume sales and lower-than-expected tax rate.

Source: Kenanga Research - 26 Apr 2018