Earnings capped

Retain HOLD rating. Our RM2.45 TP is based on 13x CY17F PE. We cut FY17-19F net profit by 21% each, following the group?s disappointing 1QFY17 results. Supermax has an ambitious expansion plan, with multiple projects planned over the next decade. However, poor access to proper infrastructure, i.e. water, electricity and gas supply, has been holding back its expansion plans.

Plants #10 and #11 have a better outlook now that 10 out of 20 lines are fully commissioned. The remaining 10 lines are scheduled for commissioning by end-2016. The group?s utilisation rate dropped marginally by 1.7ppts y-o-y to 81.6% in FY16, as plants #10 and #11 came online, and this is expected to recover to 83% in FY17F. We expect the additional capacity from Bukit Kapar to drag its utilisation rate down again in FY18F. As such, we expect sales volume to grow by 10%/10%/10% in FY17/18/19F.

EBIT/k gloves to recover. We project EBIT/k gloves to be under pressure in FY17, backed by: (1) higher operating costs, and (2) higher raw material price. We conservatively assume EBIT/k gloves to be flattish in FY18/19F.

Valuation

Valuation capped. We maintain our target PE of 13x, based on the stock?s 5-year mean. Following our earnings cut, our TP is reduced to RM2.45 from RM2.70 previously.

Key Risks to Our View

Delays in expansion plan. Supermax has seen repeated delays in rolling out its new production lines because of poor access to proper infrastructure. Further delays in the commissioning of the remaining lines in plants #10 and #11 could adversely affect our growth forecast. Currently, these two plants are expected to reach full commercial production by end of 2016.

Source: Alliance Research - 30 Nov 2016