Following a long hiatus, SUPERMX’s briefing for analysts was well attended by 50 analysts/fund managers. We are positive on SUPERMX’s improving earnings visibility due to its punctual commencement of new expansion. The key takeaways from the briefing are: (i) explanation for weak 4Q19 results, (ii) expectation of a demand surge in the US market, and (iii) potential distribution of treasury shares. TP is raised from RM1.70 to RM1.75 based on 17.5x CY20E EPS. Reiterate OP.

Weak 4Q19 explained. Supermax recently announced a weak set of 4Q19 results. Recall, 4Q19 PATAMI fell 57% to RM15m due to a mismatch between material input cost and ASP, whereby PBT margin was down to 4% compared to the normalised 12%. During the briefing, we gathered that a one-off cost of which we guesstimate to be RM10m dragged down overall 4Q19 bottom-line. For illustrative purposes, if we add back RM10m, normalised 4Q19 PATAMI would be RM25m (-28% QoQ) bringing FY19A normalised core PATAMI to RM127m (+18% YoY).

Expect US demand to surge from trade-war effect. Due to the impact of trade war whereby effective Sept 1, a 15% tariff will be imposed on Chinese-made medical and vinyl gloves, the group expect to see an uptick in demand for gloves of which the positive impact is expected to be felt from the Dec-ending quarter period. Theoretically, the tariff hike is expected to increase the price for Chinese-made gloves, which could compel a switch of US gloves demand to Malaysia glove players whereby US accounts for 30% of group sales.

Sturdy new plants, margins to improve. We expect gradual margins expansion from the fully-completed plant 12 due to better efficiency from new lines. Upon full commissioning of plant 12 in FY21, management guided an EBITDA margin of 20% compared to our conservative forecast of 16%. The capacity-enhancing plans are as follows:- (i) decommissioning old lines at Sungai Buloh plant from 12 to 20 lines (capacity increasing 97% to 2.4b pieces), and (ii) to build Plant 12 (4.4b pieces) behind the existing factory in Meru Klang. Upon full commercial production in stages from 2Q 2019 to end 4Q 2020, installed capacity will rise 30% to 27.4b pieces by end 2020. Beyond 2020, the expansions are as such; (i) new and replacement lines (5b pieces; target completion end 2020 to end 2021, and (ii) building three plants with an estimated capacity of 13.2b pieces over 3Q 2021 to 1Q 2024. Total estimated capex is RM1.2b over the next five years. In the near term, for illustrative purposes, based on a net profit margin of 9%, ASP of USD22/1,000 pieces, a utilization rate of 75% and 4.4b pieces (upon full commissioning of Plant 12), this would generate a total net profit of RM27m or 20% of our FY21E net profit.

Potential distribution of treasury shares? For illustrative purposes, in the absence of an interim dividend, it could be distributing treasury shares, currently at 54m shares. This translates into 6.2 sen per share or net yield of 4.1% at current market price.

Reiterate OUTPERFORM. We change our valuation base from FY20E to CY20E. Correspondingly, TP is raised from RM1.70 to RM1.75 based on an unchanged 17.5x CY20E EPS of 10 sen (+1.0SD above 5- year historical forward average). We like Supermax because: (i) the stock is trading at an unjustifiable 40% discount to peers’ average compared to a historical discount of 30%, and (ii) it is a prime beneficiary of a favourable USD/MYR forex since they do not hedge their sales receipts. Key risks to our call are longer-than-expected commercial operations of new plants.

Source: Kenanga Research - 10 Sept 2019