Taking cue from the other glove players’ quarterly earnings announcements over the past month, we are raising our assumptions for SUPERMX. Our analysis further suggests that ASP is expected to stay elevated over the next few quarters. We highlight that SUPERMXs OBM distribution model could yield higher margins. Hence, we raised our FY20E/FY21E net profit by 7%/33%, to account for higher margins. TP is raised from RM10.90 to RM14.00 based on 25x CY21E EPS. Reiterate OP.

Dual-stream incomes from manufacturing and distribution. Supermax is expected to gain from higher margins from both its gloves manufacturing and distribution divisions. We expect higher margins going forward due to product mix skewed higher towards OBM distribution to account for 95% of total sales compared to 70% pre Covid-19 which we believe had caught us as well as the market by surprise at a time when supply is tight due to aggressive stockpiling of critical medical supplies including gloves. With a diverse customer base, we expect SUPERMX to have better pricing power, potentially getting higher than industry average selling prices.

Our analysis suggests shortage in supply. We have done an analysis to dispel any concerns of gloves oversupply. Our analysis (see table overleaf) suggests that acute supply and supernormal demand could persist till end 2021. Interestingly, players are also getting orders from new group of users including airlines, restaurants, retail apparel chains and hotel operators. If we look at the capacity expansion numbers in isolation, it looks overwhelming. But viewed against the incremental new pandemic-driven demand in addition to the annual base level demand growth, the additional capacity is not a concern. In fact, the estimated new yearly capacity may not actually start as scheduled and hence the supply shortage will continue to be acute in 2021. Typically, to cater for normal demand, glove makers essentially need to build just one plant per year. However, from channel checks, to cater for this current pandemic-driven demand, two to three plants are required for each glove maker (on average) annually in order to meet the supernormal demand, which takes between 12 to 24 months to complete.

China and low user per capita countries are potential high growth markets. We expect gloves consumption per capita in China to surge sharply following the COVID-19 experience. For illustration purposes, assuming a population of 1.4b and conservative 30 gloves per capita (from currently 9 compared to developed western countries which averaged 200 pieces per capita), this implies a massive 42b piece (from currently 2.8bn pieces) of rubber gloves consumption in China annually. Hence, any new supply from the Chinese players could be absorbed domestically.

Raised FY20E/FY21E net profit by 7%/33% after raising EBITDA margin assumption from 21%/28% to 22%/36% in FY20E/FY21E. Raise our plant utilisation assumption for FY21 from 95% to 100%.

Undemanding FY21E PER valuation of 19x. TP is raised from RM10.90 to RM14.00 based on 25x CY21 revised EPS of 55.9 sen (previously 26x) (at slightly less +2.0SD above the 5-year historical forward mean). We lowered our PER rating as we believe valuations are pegged to supernormal earnings; hence, upside to peak earnings should have been factored in. We like Supermax because: (i) the stock is trading at an undemanding 19x FY21E EPS compared to expected explosive 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 lower-than-expected ASP

Source: Kenanga Research - 7 Jul 2020