Signs of higher ASP in the industry have prompted us to raise our ASP assumptions again. Players have again raised selling prices, indicating continuing supernormal demand and acute shortages. Standing testimony to the increasingly strong prospects of the sector, analysts surveyed by Blomberg Consensus have over the last 5 months consistently upgraded the earnings forecasts for SUPERMX. Hence, we raised our FY20E/FY21E net profit by 46%/85%, to account for higher ASP. TP is raised from RM14.00 to RM17.10 based on 22x CY21E EPS. Reiterate OP.

Expect quantum leap in earnings. We highlight that industry ASPs have strengthened for Aug delivery. Coupled with the latest strong Q-o-Q earnings results of glove players, this is suggesting that demand will continue to be strong over the next few quarters. Anecdotal evidence is also suggesting that rubber glove players’ explosive Q-o-Q earnings growth will sustain over the next few quarters. Judging by industry’s higher ASP for the month of Aug, we are raising our assumptions for SUPERMX.

Consensus upgraded earnings by 70%-170% over the past 5 months. Standing testimony to the increasingly strong prospects of the sector, analysts surveyed by Blomberg Consensus have over the last 5 months consistently upgraded their earnings forecasts for SUPERMX which we believe may not be enough judging by the runaway ASPs which will be higher M-o-M at least till end Dec 2020.

Two bets for the price of one. 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. On new capacity, its Plant 12 comprises 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, 3 new 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.

Raised FY20E/FY21E net profit by 46%/85% after raising ASP from USD24/USD36//1,000 pieces to USD31/USD40/1,000 pieces in FY20E/FY21E.

Undemanding FY21E PER valuation of 18x compared to >100% earnings growth. TP is raised from RM14.00 to RM17.10 based on 22x CY21 revised EPS of 77.6 sen (previously 25x) (at slightly below +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 18x 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.

Source: Kenanga Research - 13 Jul 2020