INVESTMENT HIGHLIGHTS

• 4QFY17 earnings below expectations

• High operating expenses a drag on earnings

• FY18F earnings forecast revised down by -7.9%

• Declared 2.5sen dividend per share

• Maintain NEUTRAL with a revised TP of RM1.94 per share

Below expectations. Supermax’s 4QFY17 earnings came in at RM8.3m. This brings its full year FY17 earnings to RM70.3m which is below expectations, accounting for 85.7% and 74.1% of our and street’s full year earnings forecasts respectively. During the quarter, revenue and PATANCI climbed by +17.0% and +23.0% year-over-year respectively. However, on a quarterly sequential basis, revenue only increased marginally by +1.4% while PATANCI dipped by -55.7%.

High operating expenses a drag on earnings. Supermax’s revenue recorded an increase for both year-over-year as well as quarter-overquarter due to: (i) a more favourable exchange rate for USD vs MYR during the quarter which averaged at about RM4.33 per USD vs RM4.01 in the same quarter last year; (ii) higher output rising from revamp work on its older production lines and; (iii) higher average selling prices (ASPs). However, earnings dipped against preceding quarter due to the lag in transferring the steep increase in raw material price by >80%yoy in 1QFY17. 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, PATANCI margin contracted to 2.7% from 6.1% last quarter.

FY18F earnings forecasts revised down by -7.9%. We are revising our earnings forecasts for FY18F down by -7.9% as we increase our operating expenses assumptions given that Supermax is expecting to incur further expenses for its contact lens business in the next coming 12 months. In addition, we also remain weary on the delay in the commissioning the remaining six lines from its Plant 10 and 11 located in Klang due to an 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 RM1.94. Post-earnings revision, we are maintaining our NEUTRAL recommendation on Supermax with a revised TP of RM1.94 per share (from RM2.11 previously). Our TP is derived via pegging our FY18F EPS of 13.9sen to an unchanged PER18 of 14x, which is its 5-year average PER. We think that despite the strong demand for rubber gloves going forward, the delay in commissioning the remaining six gloves production lines and high marketing expenses incurred for its contact lens business will offset the potential gains that could come from the strong demand. However, we take comfort with the fact that management will continuously revamp its older production lines to compensate for the absence of new capacity from the delayed lines in Plants 10 and 11. In addition, 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 - 30 Aug 2017