KEY INVESTMENT HIGHLIGHTS

• 9MFY20 earnings above expectations

• Strong earnings in 3QFY20 due to strong demand for gloves

• Earnings forecast revised upwards

• Maintain Neutral with a revised TP of RM4.09

9MFY20 earnings above expectations. Supermax’s 9MFY20 core net earnings of RM123.9m came in above our and consensus expectations, making up 102% and 84% of our and consensus full year estimates respectively. The positive deviation could be attributed to the stronger than expected average selling price (ASP) of gloves and better than expected margin.

Strong earnings in 3QFY20. On sequential basis, 3QFY20 core net profit surged to RM78.5m (+293.3%qoq) mainly due to exponential rise in demand for gloves as a result of the Covid-19 outbreak. That has led to higher sales volume and higher ASP of gloves. On yearly basis, 3QFY20 core net profit grew 170.6%yoy, bringing 9MFY20 cumulative earnings to RM123.9m (+22.1%yoy). Note that we have excluded forex gain in our core net income calculations. The earnings growth in 9MFY20 was underpinned by higher sales volume and higher ASP of gloves. Besides, lower raw material prices have also helped in earnings growth which has resulted core PBT margin to expand to 13.9% in 9MFY20 from 13.4% in 9MFY19.

Earnings forecasts revised upwards. We revise our FY20/21/22F earnings forecasts by +67%/+54.2%/+40.3% as we factor in lower raw material prices and higher sales from gloves as a result of strong demand for gloves. Meanwhile, Supermax is expanding its production capacity with 3 plants under construction. The 3 plants would increase Supermax’s installed capacity by 12billion pieces from 26.18billion gloves to 38.18billion gloves by CY2022.

Maintain Neutral with a revised TP of RM4.09. Post our earnings upward adjustments, we are revising our target price to RM4.09 (previously RM1.75). Our TP is derived via pegging the FY21F EPS of 16.14sen to target PER of 21.1x which equates to +2SD of its 3-year historical mean. We think that the above mean valuation is justified at this juncture given the robust demand for gloves in the near to medium term. We maintain our Neutral call on Supermax.

Source: MIDF Research - 21 May 2020