What’s New

• 2QFY17 earnings came in at RM22m, trailing expectations
• Revenue dropped on the back of lower production; operating margins improved q-o-q
• Maintain HOLD with TP of RM2.10

Earnings impacted by lower volume

Retain HOLD rating. Our RM2.10 TP is based on 13x CY17F PE. We cut our FY17-19F net profit forecasts by 9-17%, following the group’s disappointing 2QFY17 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. However, we suspect they may be some delay as it has not been reflected in the earnings. 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. The lower production from older plants may drag down the utilisation rate to 75% in FY17F. We expect the utilisation rate to improve in FY18/19F. Premised on this, we expect sales volume to decrease by 28% in FY17F and grow by 9%/12% p.a. in FY18/19F.

EBIT/k gloves to drop. We project EBIT/k gloves to be under pressure in FY17, backed by: (1) higher operating costs, and (2) higher raw material price. The cost pass-through may be able to mitigate the higher costs however it may impact EBIT/k gloves as there is a time lag in adjusting prices. We conservatively assume EBIT/k gloves to improve slightly in FY18/19F.

Valuation

We maintain our target PE of 13x, which is below the stock’s 5-year mean. Following our earnings cut, our TP is reduced to RM2.10 from RM2.45 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-2016.

Source: Alliance Research - 27 Feb 2017