INVESTMENT HIGHLIGHTS

• FY19 earnings rose by +16.0%yoy to RM123.8m driven by the higher sales volume

• Temporary blip in 4QFY19 earnings (-56.5%qoq) due to the sharp rise in rubber latex price

• However, rubber latex price has since eased and hence, we expect strong earnings going forward

• Maintain BUY with an unchanged TP of RM2.07 per share

FY19 earnings rose by +16.0%yoy to RM123.8m. Supermax’s 4QFY19 earnings came in at RM15.1m. This brings its FY19 earnings to RM123.8m (+16.0%yoy). However, this lagged our and consensus’ expectation, accounting for 86.0% and 85.0% of our and consensus’ full year FY19 earnings estimates respectively. The deviation in financial performance was mainly due to higher-than-expected rubber latex price. Moving forward, we observe that the price has moderated in recent months.

Production cost expected to trend lower. The decline in 4QFY19 earnings sequentially was as a result of the abrupt upward movement in the rubber latex price by about +23.0%yoy to RM5.00/kg during the quarter. This significantly reduce PBT margin by -9.4ppts qoq to 4.3% as the group’s natural rubber glove product mix ratio is quite sizeable at 48.0%. Nonetheless, the effective tax rate was significantly reduced to 13.5% from 41.3% in 4QFY18. We gathered that rubber latex price has eased by -12.0%qoq to about RM4.40/kg in August 2019. Hence, we expect a lower cost of production going forward.

Commencement of a new plant in the 3QCY19. The first phase of its new 12th plant in Meru, Klang is on schedule for completion in the 3QCY19. This plant will be equipped with new high-speed and highly automated production lines. In summary, the expansion plan will boost Supermax’s production capacity by +4.4b and +3.2b pieces per annum in FY20 and FY21 respectively. By the end of the expansion programme, the group will have a production capacity of 29.4b pieces per annum (+35.0%). No dividend was declared during the quarter in order to fund this expansion plan.

Source: MIDF Research - 3 Sept 2019