KEY INVESTMENT HIGHLIGHTS

• 1QFY20 earnings came in at RM24.7m (+64.3qoq) primarily due to lower production cost

• Average selling price remain subdued in view of intense competition

• Nonetheless, the group’s capacity expansion plan remain on track

• We expect future earnings to be supported by a higher sales volume

• Maintain BUY with a revised TP of RM2.09

1QFY20 earnings improved by +64.3%qoq. Supermax’s 1QFY20 earnings came in at RM24.7m which lagged our and consensus’ expectation, accounting for 15.4% and 17.8% of our and consensus’ full year FY20 earnings estimates respectively. The deviation in financial performance was mainly due to the lower average selling price (ASP) resulting from intense competition among glove players.

Earnings lifted by lower production cost. Despite the marginal drop in 1QFY20 revenue of -1.6%qoq caused by the subdued ASP, this was mitigated by the lower rubber latex prices (-8.0%qoq). To recall, in the previous quarter, earnings was severely impacted by the abrupt upward movement in the rubber latex price by about +23.0%qoq to RM5.00/kg as the group’s natural rubber glove product mix ratio is sizeable at 48.0%. We gathered that the rubber latex price to remain at current level. Hence, we expect production cost to taper off in the coming quarters.

Capacity expansion is on track. The first phase of its new 12th plant in Meru, Klang has already been completed during the quarter. This plant is equipped with new high-speed and highly automated production lines. In summary, the expansion plan will boost Supermax’s FY20 and FY21 production capacity by +4.4b and +3.2b pieces per annum respectively. By the end of the expansion programme, the group will have a production capacity of 29.4b pieces per annum (+35.0%).

Impact to earnings. We are revising our FY20 and FY21 forecast downward to RM139.1m and RM164.3m to take into account the prolong subdued ASP for glove products and lower utilisation rate.

Target Price. We are revising our target price to RM2.09 (previously RM2.07) as we rolled over our valuation base year to FY21. Our TP is derived via pegging the FY21F EPS of 12.5sen to target PER of 16.7x which is its five-year historical average PER.

Source: MIDF Research - 29 Nov 2019