INVESTMENT HIGHLIGHTS

• FY18 earnings below expectations due to higher operating expenses, mainly incurred in 4QFY18

• Newly commissioned production lines boosted revenue

• Expecting a stronger financial performance in FY19, in-line with the expansion in production capacity

• Maintain NEUTRAL with an adjusted TP of RM3.58 per share

Below expectations. Supermax’s 4QFY18 earnings came in at RM9.8m. This brings its full year FY18 earnings to RM107.0m which is below expectations, accounting for only 82.0% of both ours and consensus’ full year FY18 earnings estimates. During the quarter, revenue and PATAMI rose by +5.3%yoy and +84.2%yoy respectively.

Newly commissioned production lines boosted revenue. Supermax’s 4QFY18 revenue saw an increase year-over-year due to: (i) higher average selling prices (ASPs); (ii) higher output rising from revamp work on its older production lines; and (iii) increased output from newly commissioned production lines from Plant 10 and Plant 11 in Klang. In addition, there are higher demands coming from countries such as those in Eastern Europe, which are currently in the midst of upgrading their healthcare quality as a result of increase in healthcare awareness. Also, a reduction in effective tax rate to 51.0% (from 73.0% in 4QFY17) caused the surged in PATAMI.

Impact to earnings. We are maintaining our earnings forecast for FY19F as we expect the rebuilding and replacement of old production facilities as well as the commencement of two additional plants in FY19 will contribute to stronger earnings. Key risks to our earnings estimates would be: (i) sudden surge in raw materials price; (ii) strong appreciation of Ringgit; and (iii) production line breakdowns.

Target Price. We revised our target price to RM3.58 per share (from RM3.31 previously) as we rolled forward our valuation base year to FY20. Our TP is derived via pegging our FY20F EPS of 25.6sen to an unchanged PER19 of 14x, which is its 5-year average PER.

Source: MIDF Research - 30 Aug 2018