1HFY20 core net profit of RM55m (-19% YoY) came in at 42% each of our and consensus full-year forecasts. We consider the results to be within expectation as we expect subsequent quarters to be ramped up by new capacity with nascent signs of strong volume growth rebound. With the past lacklustre demand far behind us, we see ramped-up restocking activities as the current outbreak of the Wuhan virus reinforced higher hygiene standard. TP is RM2.00 based on unchanged 20x CY20E EPS. Reiterate OP.

Key results’ highlights. QoQ, 2QFY20 revenue rose 4% largely due to higher volume sales from new lines commissioned in Plant 12. 2QFY20 PBT rose 29% as PBT margin rose 2ppt to 11% from 9% in 1QFY20 due to better economies of scale and improved efficiencies from the new plant. This brings 2QFY20 core net profit to RM30m (+22% QoQ) which was negated by a higher effective tax rate of 28% compared to 23% in 1QFY20. No dividend was declared in this quarter as expected.

YoY, 1HFY20 core net profit fell 19% to RM55m after excluding one-off insurance claims (RM6.5m) in 1HFY19 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 latex price (+10%) in 1QFY20 which had since tapered off.

Earnings expected to trend higher in subsequent quarters. We are positive on Supermax’s growth prospect going forward, underpinned by demand uptick with nascent signs of a strong volume growth rebound. With the past lacklustre demand far behind us, we see ramped-up restocking activities as the current outbreak of the Wuhan virus reinforced higher hygiene standards, spurring the strong sequential 2QFY20 earnings momentum into FY21.

Outlook. Plant 12 consists of Block A and Block B, each consisting of 8 double former lines with 2,2b pieces each (total 4.4b pieces). As of now, block A (5 lines already started commercial production), the remaining 3 lines are expected to be ready by 1Q 2020. For Block B, all 8 lines are expected to be fully commissioned by 2H 2020. Upon full commercial production in stages from 2QCY19 to end-4QCY20, installed capacity will rise 20% to 26.2b pieces per annum. Recall, it had completed the acquisition of a piece of land in Meru, Klang on which it plans to build three plants namely Plant 13,14 and 15 which will contribute another 13.2bn pieces of gloves to the Group‟s installed capacity over the next 5 years.

Reiterate OUTPERFORM. TP is RM2.00 based 20x CY20 EPS of 10.0 sen (at +1.5 SD above 5-year historical forward mean). 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 favourable USD/MYR forex trend 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 - 26 Feb 2020