INVESTMENT HIGHLIGHTS

• 1QFY18 earnings above expectations

• Refurbished production lines boosted revenue

• FY18-19F earnings forecast revised up by +17.2% and 5.4% respectively

• Upgrade to BUY with a revised TP of RM2.42 per share

Above expectations. Supermax’s 1QFY18 earnings came in at RM27.9m which is above our and consensus’ full year expectations, accounting for 29.6% and 29% of our and street’s full year earnings forecasts respectively. During the quarter, revenue and PATANCI climbed by +16.0% and +42.8% year-over-year respectively. However, on a quarterly sequential basis, revenue declined marginally by -0.2% while PATANCI climbed by >100%.

Refurbished production lines boosted revenue. 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 RM4.26 per USD vs RM4.05 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). In addition, earnings climbed by >100%yoy in 1QFY18 due to improved demand which is partly due to the switch from vinyl to rubber gloves. This is a result of the regulatory compliance that China has to adhere to under Paris Climate Agreement. Due to that, PATANCI margin has also improved to 8.9% from 7.3% in 1QFY17.

FY18-19F earnings forecasts revised up by +17.2% and +5.4%. We are revising our earnings forecasts for FY18-19F up by +17.2% and +5.4% respectively as we lower our operating expenses assumptions, expecting lesser spending on refurbishing older production lines going forward. Key risks to our earnings would most likely be: (i) sudden surge in raw materials price; (ii) strong appreciation of Ringgit and; (iii) continued delay in capacity expansion.

Upgrade to BUY with a revised Target Price (TP) of RM2.42. Post-earnings revision and rolling over our valuation base year to FY19, we are upgrading our recommendation on Supermax to a BUY (previously Neutral) with a revised TP of RM2.42 per share (from RM1.94 previously). Our TP is derived via pegging our FY19F EPS of 17.3sen to an unchanged PER19 of 14x, which is its 5-year average PER. Going forward, the strong demand for rubber gloves originating from the switch from vinyl gloves to rubber gloves will persist – one of the key revenue drivers for the company. Additionally, we take comfort in the fact that management is committed in revamping its older production lines in absence of the capacity from the delayed lines in Plant 10 and 11. Furthermore, the current stable currency environment will be beneficial to glove manufacturers by providing visibility on both revenue and expenses.

Source: MIDF Research - 22 Nov 2017