By Raymond Choo Ping Khoon l pkchoo@kenanga.com.my FY20 core net profit of RM526m (+345% YoY) beat expectations by 35%/31% of our/consensus full-year forecasts. The positive variance compared to our forecast was due to higher-than-expected ASP and margin. We raise our FY21E/FY22E net profit by 57%/58% taking into account higher ASP and margin. TP is raised from RM17.10 to RM25.45 based on 20.8x CY21E EPS. Reiterate OP.

Key results’ highlights. QoQ, 4QFY20 revenue rose 107%, 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. 4QFY20 PBT rose 444% as PBT margin rose 34.6ppt to 55.9% from 21.3% in 3QFY20, largely due to higher ASP, better economies of scale on improved efficiencies from the new plant, and higher margins from Own Brand Manufacturing (OBM) in both Manufacturing & Distribution divisions. This brings 4QFY20 core net profit to RM400m (+462% QoQ) which was further boosted by a lower effective tax rate of 21% compared to 24% in 3QFY20. A final single-tier dividend was proposed via a share dividend distribution on the basis of 1 treasury share for every 45 ordinary shares implying 47.0 sen/share at current market price of RM21.20/share or 2.2% yield.

YoY, FY20 core net profit rose 345% to RM526m due to revenue growth (+39%) and further boosted by higher ASP. Net cash position rose to RM853m with cash & bank balances amounting to RM1.2b as of 30 June 2020 compared to net debt of RM218m in FY19. The cash deluge is mainly due to customers paying 30%, 40% and 50% deposits in advance to secure supply.

Key highlight is ASP anticipated to continue rising, Two bets for the price of one. The highest ASPs so far have not been reflected in this current quarter and we are optimistic that the group’s OBM-cum- distribution business model will exhibit even healthier performance in the coming quarters. 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% in advance deposits 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.

We upgrade FY21E/FY22E net profit by 57%/58% after raising ASP/1,000 pieces from USD36/USD40 to USD44/USD43 in FY21E/FY22E, and raising EBITDA margin from 36% to 48%.

Undemanding FY21E PER valuation of 17x compared to expected earnings growth of 200%. Correspondingly, our TP is raised from RM17.10 to RM25.45 based on 20.8x CY21 revised EPS of 122.3 sen (previously 22x) (at slightly below +2.0SD above the 5-year historical forward mean). We like Supermax because: (i) the stock is trading at an undemanding 17x FY21E EPS compared to expected explosive earnings growth of >100%, and (ii) its OBM model enables it to 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 - 11 Aug 2020