9MFY20 core net profit of RM126m (+23% YoY) came in above expectations at 77%/86% of our/consensus full-year forecasts. The positive variance compared to our forecast is due to higher-than-expected ASP. We believe consensus have under-estimated the potential impact from higher ASP and margins from its OBM distribution amidst the current tight supply situation for gloves with buyers aggressively stockpiling critical medical supplies. We raise our FY20E/FY21E net profit by 36%/16%. TP is raised from RM6.00 to RM6.60 based on unchanged 26x CY21E EPS. Reiterate OP.

Key results’ highlights. QoQ, 3QFY20 revenue rose 16% largely due to higher ASPs and volume sales from new lines commissioned in Plant 12. The increase in overall sales was mainly due to surge from the group’s overseas distribution centres as a result of an exponential surge in demand due to the pandemic. 3QFY20 PBT rose 128% as PBT margin rose 10.5ppt to 21.3% from 10.9% in 2QFY20, largely due to higher ASP, better economies of scale from improved efficiencies from the new plant and lower production costs. Specifically, QoQ, nitrile and natural rubber material prices have decreased 7.3% and 2.5%, respectively. This brings 3QFY20 core net profit to RM71m (+136% QoQ) which was further boosted by a lower effective tax rate of 24% compared to 28% in 2QFY20. No dividend was declared in this quarter as expected.

YoY, 9MFY20 core net profit rose 23% to RM126m despite flat revenue growth (+8%) due to higher average selling prices and lower production costs namely nitrile and latex input costs.

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, for Block A, its remaining three lines started commissioning end March 2020 on top of the five lines already in commercial production. For Block B, all eight lines are expected to be fully commissioned by 2H 2020. Upon full commercial production by 2H 2020, its installed capacity will rise 13.4% 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 12bn pieces of gloves to its total installed capacity over the next few years.

Raised FY20E/FY21E net profit by 36%/16% after raising utilisation rate from 85%/97% to 91%/99%. We also raise our ASP from USD23.80/1,000 to USD32/1,000 in FY20 and from USD32/1,000 to USD38/1,000 pieces in FY21.

Undemanding FY21E PER valuation of 18x compared to expected earnings growth of 55%. Correspondingly, our TP is raised form RM6.00 to RM6.60 based on unchanged 26x CY21 revised EPS of 25.4 sen (at slightly above +2.0SD above the 5-year historical forward mean). We like Supermax because the stock is trading at an undemanding 18x FY21E EPS compared to expected earnings growth of 53%. We believe consensus have under-estimated the potential impact from higher ASP and margins from its OBM distribution amidst the current tight supply situation for gloves with buyers aggressively stockpiling critical medical supplies. Reiterate Outperform. Key risk to our call is longer-than-expected commercial operations of new plants.

Source: Kenanga Research - 21 May 2020