INVESTMENT HIGHLIGHTS

• 2QFY17 earnings below expectations

• Lower output from older production lines a drag on earnings

• FY17-18F earnings forecast revised by -18.2% and -9.3%

• Maintain NEUTRAL with a revised TP of RM2.20

Below expectations. Supermax’s 2QFY17 earnings came in at RM22.6m. This brings its 1HFY17 earnings to RM42.2m which is below our and consensus’ full year expectations, accounting for 38% and 28% of full year earnings forecasts respectively. During the quarter, revenue dipped by -18.6% while PATANCI declined by -41.7% year-over-year respectively. Meanwhile, on a quarterly sequential basis, revenue slumped by -12% followed by PATANCI grew by +15.8%.

Lower output from older production lines a drag on earnings. Despite experiencing a more favourable exchange rate for USD vs MYR during the quarter which averaged at about RM4.32 per USD vs RM4.28 in the same quarter last year, Supermax’s revenue recorded a decline for both year-over-year as well as quarter-over-quarter. The dip in revenue as opposed to the same quarter last year was mainly due to lower output produced during the quarter from some of its older plants. We think that the company might be undertaking a revamp or upgrading works on its older production lines in order to keep up with newer orders. In addition, we think that the higher raw material prices for both natural rubber and nitrile butadiene as well as lower average selling prices (ASPs) due to competition as opposed to the same period last year might have contributed to the declining revenue as well.

Earnings forecasts. We are revising our earnings forecasts for FY17- 18F down by -18.2% and -9.3% respectively as we reduced our utilisation rate assumption for FY17-18F from 75% previously to 68% (for FY17) and 70% (for FY18) respectively in view of the loss in production output from its older lines as well as the delay in the commissioning the remaining six lines from its Plant 10 and 11 located in Klang due to water supply issues. 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.

Maintain NEUTRAL with a revised Target Price (TP) of RM2.20. Post-earnings revision, we are maintaining our NEUTRAL recommendation on Supermax with a revised TP of RM2.20 per share (from RM2.42 previously). Our TP is derived via pegging our FY18F EPS of 15.7sen 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 loss in production output 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 that the current situation will persist in the longer term

Source: MIDF Research - 27 Feb 2017