In an announcement to Bursa Malaysia, SUPERMX is venturing into the United States of America (USA) to manufacture Made-in-USA medical gloves and other personal protective equipment (PPE), as well as building a National Headquarters there with an initial capital outlay of USD100m (RM405m). We are concerned over the overseas execution risk. As such, we reduce our target price to RM9.05 based on 9.8x CY21 EPS as we attach a 25% discount to our target PER (at -0.5SD below 5-year forward mean). Reiterate Outperform.

Venturing into US. In an announcement to Bursa Malaysia, Supermx is venturing into the United States of America (USA) to manufacture Made-in-USA medical gloves and other personal protective equipment (PPE) as well as the building of a National Headquarters in the USA with an initial capital outlay of USD100m (RM405m). The group has incorporated Maxter Healthcare Incorporated with an issued and paid-up share capital of USD1. Subsequently, the paid-up share capital will be increased to USD100m (RM405m). The initial paid capital is part of the total allocation of USD550m capital investment for Medical Glove Plant #18 when both Phase #1 & #2 are completed and commissioned for which details are scant at the moment with regards to production capacity. The funding is expected to be financed through a combination of internally generated funds and bank borrowings, the ratio to be decided at a later date. We understand that financing is expected to come from profits generated from distribution centres. The group has a net cash of RM2b as at 30 Sept 2020.

Beneficiary from gloves manufacturing and OBM distribution. We do not expect supply to flood the market at least in the first three quarters of 2021 despite growing concerns amongst investors that a number of Malaysian listed companies have announced new ventures into the gloves manufacturing segment. Supermax is expected to gain from higher margins from both its gloves manufacturing and OBM distribution due to abnormal demand and acute supply tightness. 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 have started commissioning in end March 2020 on top of the 5 lines already in commercial production. For Block B, as all 8 lines were scheduled to be fully commissioned by 2H 2020, we expect the installed capacity (on full commercial production) to have risen by 13.4% to 26.2b pieces per annum by now.

Undemanding PER valuation. Correspondingly, we reduce our target price from RM12.00 to RM9.05 as we attached a 25% discount to our target PER from 13x to 9.8x CY21 EPS (at 0.5SD below 5-year forward mean). We continue to like Supermax because: (i) the stock is trading at an undemanding 8x 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. Its inclusion in the FBMKLCI was effective today, coming in with a weight of 2.13% as expected. Other re-rating catalyst is the proposed dual listing on the Singapore Exchange (SGX). Reiterate Outperform.

Key risk to our call is lower-than-expected ASP.

Source: Kenanga Research - 22 Dec 2020