• 1QFY17 earnings below expectations

• Revenue supported by favourable demand

• Earnings impacted by higher tax

• FY17-18F earnings forecast revised by -24.4% and -25%

• Downgrade to NEUTRAL with a revised TP of RM2.42

Below expectations. Supermax’s 1QFY17 earnings of RM19.5m came in below our and consensus’ full year expectations. During the quarter, revenue dipped by -13.2% while PATANCI declined by -49.2% yearover-year respectively. Meanwhile, on a quarterly sequential basis, revenue grew marginally by +0.9% followed by PATANCI by +187.8%.

Revenue supported by favourable demand. Supermax’s revenue continues to record an increase quarter-over-quarter which was mainly attributable to favourable USD to MYR exchange rate which averaged at about RM4.05 per USD as well as better demand from its customers for both natural rubber and nitrile gloves. Note that the -13.2% dip in revenue as opposed to the same quarter last year was mainly due to lower raw material prices for both natural rubber and nitrile butadiene during the 9MFY16 period.

Earnings affected by external factors. Despite recording higher revenue during the period, PATANCI dipped by -49.2% year-over-year. This was mainly due to the increase in production costs arising from the hike in minimum wages and further rationalisation of natural gas subsidy which took effect back in July 2016. Furthermore, its profitability was also affected by additional costs incurred for its contact lens division particularly in terms of advertising and promotion expenses. Note that the significant increase of +187.8% against preceding quarter was mainly due to higher tax paid amounting to RM7.7m with respect to previous years’ assessments and provision for deferred tax during the preceding quarter.

Earnings forecasts. We are revising our earnings forecasts for FY17- 18F down by -24.4% and -25% respectively in view of the current increase in raw material prices that could put pressure on margins. Key risks to our earnings would most likely be: (i) aggressive competition which may squeeze margins and ASP; (ii) strong appreciation of Ringgit and; (iii) continued delay in capacity expansion.

Downgrade to NEUTRAL with a revised Target Price (TP) of RM2.42. Post earnings announcement and after rolling forward our valuation to FY18, we are downgrading our recommendation on Supermax to NEUTRAL with a revised TP of RM2.42 per share. Our TP is derived via pegging our FY18F EPS of 17.3sen to an unchanged PER of 14x, which is its 3-year average PER. We think that despite the strong demand for rubber gloves going forward, the increasingly intense competition as well as the increase in raw material prices could potentially pressure margins and ASP. That said, we do think that the company will benefit from the current currency environment i.e the strong USD appreciation against MYR. However, we do not think the current situation will persist in the longer term.

Source: MIDF Research - 30 Nov 2016