1QFY20 core net profit of RM25m (+71% QoQ; -17% YoY) came in at 19%/18% of our/consensus full-year forecasts. We consider the results to be within our expectation as we expect subsequent quarters to be ramped up by new capacity and easing of raw material cost. We expect its valuation discount to peers’ average to narrow from the current 40% to the 30% historical level. Reiterate Outperform. TP is RM1.75 based on unchanged 17.5x FY20E EPS.

Key results’ highlights. QoQ, 1QFY20 revenue fell 1% largely due to lower ASP. However, due to the easing of natural latex price by 8% QoQ, 1QFY20 PBT jumped >100%. This was a reversal from a mismatch between input material cost and ASP in 4QFY19, which negatively impacted bottom-line. Hence, PBT margin rose from 4% in 4QFY19 to 9% in 1QFY20. This brings 1QFY20 core net profit to RM25m (+71% QoQ) which was negated by a higher effective tax rate of 23% compared to 14% in 4QFY19 which enjoyed a tax refund. No dividend was declared in this quarter.

YoY, 1QFY20 core net profit fell 17% to RM25m after excluding one-off insurance claims (RM6.5m) in 1QFY19 despite a flat revenue growth (0.8%) due to lower average selling prices and increase in production costs namely natural gas price and a higher raw material latex price (+10%).

Earnings expect to be higher in subsequent quarters. We understand that subsequent quarters’ earnings are expected to gradually improve, driven by cost pass-through via hikes in ASPs, favourable USD/MYR forex, normalised margins, sustained demand growth for rubber gloves and efficiencies derived from internal production processes. Due to the lag effect in passing cost through, as a result of a sharp surge in raw material (latex), Supermax had since conservatively raised ASPs by between 2-5%, which should contain high operating costs and put brakes on further margin compression. Recall, while pricing adjustments were made accordingly, there was a time lag of two months before the cost increase could be shared out with customers.

Outlook. The capacity plans are as follow:- (i) decommissioning old lines at Sungai Buloh plant from 12 to 20 lines (capacity to increase by 97% to 2.4b pieces), and (ii) to build Plant 12 (4.4b pieces) behind the existing factory in Meru Klang, i.e. Plant 10 and Plant 11. Upon full commercial production in stages from 2QCY19 to end-4QCY20, installed capacity will rise 30% to 26.2b pieces per annum.

Reiterate OUTPERFORM. TP is RM1.75 based on an unchanged 17.5x CY20E EPS of 10.0 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: later-than-expected start of commercial operations of new plants, lower-than-expected volume sales, and higher-than-expected tax rate.

Source: Kenanga Research - 29 Nov 2019