In an announcement to Bursa Malaysia, SUPERMX disclosed that it is buying another piece of land for RM21.8m which is located within the vicinity of its Klang Maxter Glove plant as well as two other pieces of land purchased recently in April 2020 and July 2019 which should yield operational synergies. We are positive on SUPERMX’s improving earnings visibility due to the scrupulous execution of its expansion plans. More importantly, recent land acquisitions underlined SUPERMX’s commitment towards future growth. TP is RM10.90 based on 26x CY21 EPS of 41.9 sen. Reiterate OP.

Buying land for RM21.8m. In an announcement to Bursa Malaysia, SUPERMX’s wholly-owned Maxter Glove Manufacturing Sdn Bhd is buying a piece of industrial land for RM21.8m measuring 5 acres (218k sq feet). The acquisition works out to RM100/sq feet which is about 9% more expensive than the previous adjacent acquisition at RM92/sq feet purchased back in Apr 2020. With the latest acquisition, the enlarged land tract and subsequent expanded facility within the vicinity of its Klang Maxter Glove plant should yield operational synergies and greater economies of scale. Specifically, the land is located between Plant 12 and its nearby factories in Klang. Based on our estimates, the size of this piece of land can house one plant with an estimated capacity of 4.7b pieces per annum. The RM21.8m land acquisition and estimated capex of RM60-100m for plant and machinery will not have any material impact on SUPERMX’s net debt and net gearing of RM254m and 0.2x, respectively, as at 31 Mar 2020 which will be further reinforced with operating cash flows averaging RM380m per annum over the next two years.

Outlook. Supermax is expected to gain from higher margins from both its gloves manufacturing and OBM distribution due to abnormal demand and acute supply tightness. Amplifying the pent-up demand, buyers are paying between 30% to 50% deposits in advance to secure glove supply and timely delivery. Supermax expects the heightened demand to continue for the next 1 to 1.5 years. As demand picks up, containers are shipping at prices higher than preceding months. 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 3 lines started commissioning in end March 2020 on top of the 5 lines already in commercial production. For Block B, all 8 lines are expected to be fully commissioned by 2H 2020. Upon full commercial production by 2H 2020, installed capacity will rise 13.4% to 26.2b pieces per annum.

Undemanding FY21E PER valuation compared to earnings growth of >100%. TP is RM10.90 based on unchanged 26x CY21 EPS of 41.9 sen (at slightly above +2.0SD above the 5-year historical forward mean). We like Supermax because: (i) the stock is trading at an undemanding 21x FY21E EPS compared to expected earnings growth of >100%, and (ii) of its OBM model, where it can extract higher margin from distributor prices, compared to the OEM model at lower factory prices. Reiterate Outperform.

Key risk to our call is longer-than-expected commercial operations of new plants.

Source: Kenanga Research - 10 Jun 2020