INVESTMENT HIGHLIGHTS

• 3QFY17 earnings below expectations

• Higher operating expenses a drag on earnings

• FY17-18F earnings forecast revised down by -11.2% and - 4.0% respectively

• Declared 2.5sen dividend per share

• Maintain NEUTRAL with a revised TP of RM2.11 per share

Below expectations. Supermax’s 3QFY17 earnings came in at RM18.8m. This brings its 9MFY17 earnings to RM60m which is below our and consensus’ full year expectations, accounting for 66% and 59% of full year earnings forecasts respectively. During the quarter, revenue climbed by +37.0% while PATANCI declined by -4.3% year-over-year respectively. Meanwhile, on a quarterly sequential basis, revenue also increased by +30.2% but PATANCI dipped by -16.8%. Supermax also declared a single tier dividend of 2.5sen for the quarter under review to be paid out on 28th July 2017.

Higher operating expenses a drag on earnings. Supermax’s revenue recorded an increase for both year-over-year as well as quarter-over-quarter due to: (i) a more favourable exchange rate for USD vs MYR during the quarter which averaged at about RM4.45 per USD vs RM4.19 in the same quarter last year and; (ii) higher output rising from revamp work on its older production lines. However, earnings dipped against last year and preceding quarter due to the sharp increase in raw material price by >80%yoy. In addition, the company also incurred pre-operating expenses on new start-ups overseas as well as advertising and promotional costs for its new contact lens product launch overseas. Due to that, PBT margin contracted to 6.8% vs 14.9% last year.

FY17-18F earnings forecasts revised down by -11.2% and - 4.0%. We are revising our earnings forecasts for FY17-18F down by - 11.2% and -4.0% respectively as we increase our operating expenses assumptions for both years given that Supermax is expecting to incur further expenses with regards to its contact lens business. In addition, we are also weary on the delay in the commissioning the remaining six lines from its Plant 10 and 11 located in Klang due to unresolved 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 RM2.11. Post-earnings revision, we are maintaining our NEUTRAL recommendation on Supermax with a revised TP of RM2.11 per share (from RM2.20 previously). Our TP is derived via pegging our FY18F EPS of 15.0sen to an unchanged PER18 of 14x, which is its 3-year average PER. We think that despite the strong demand for rubber gloves going forward, the delay in commissioning the remaining six production lines will offset the potential gains that could come from the strong demand. That said; the current stable currency environment will be beneficial to the glove player in terms of providing visibility on both revenue and expenses.

Source: MIDF Research - 31 May 2017