We are positive on SUPERMX’s improving earnings visibility due to commencement of new expansion. BUY with target price of RM1.75 based on 17.5x CY20E EPS. We like Supermax because: (i) the stock is trading at an unjustifiable 40% discount to peers’ average compared to a historical discount of 30%, and (ii) it is a prime beneficiary of a favourable USD/MYR forex since they do not hedge their sales receipts.

Due to the impact of trade war whereby effective Sept 1, a 15% tariff will be imposed on Chinese-made medical and vinyl gloves, the group expect to see an uptick in demand for gloves of which the positive impact is expected to be felt from the Decending quarter period. Theoretically, the tariff hike is expected to increase the price for Chinese-made gloves, which could compel a switch of US gloves demand to Malaysia glove players whereby US accounts for 30% of group sales.

We expect gradual margins expansion from the fullycompleted plant 12 due to better efficiency from new lines. Upon full commissioning of plant 12 in FY21, management guided an EBITDA margin of 20% compared to our conservative forecast of 16%. The capacity-enhancing plans are as follows:- (i) decommissioning of old lines at Sungai Buloh plant from 12 to 20 lines (capacity increasing 97% to 2.4bn pieces), and (ii) to build Plant 12 (4.4bn pieces) behind the existing factory in Meru Klang.

Upon full commercial production in stages from 2Q 2019 to end 4Q 2020, installed capacity will rise 30% to 27.4bn pieces by end 2020. Beyond 2020, the expansions are as such; (i) new and replacement lines (5bn pieces; target completion end 2020 to end 2021, and (ii) building three plants with an estimated capacity of 13.2bn pieces over 3Q 2021 to 1Q 2024. Total estimated capex is RM1.2bn over the next five years.

In the near term based on a net profit margin of 9%, average selling price (ASP) of USD22/1,000 pieces, a utilization rate of 75% and 4.4bn pieces (upon full commissioning of Plant 12), this would generate a total net profit of RM27m or 20% of our FY21E net profit. Meanwhile in the absence of an interim dividend, it could be distributing treasury shares, currently at 54m shares. This translates into 6.2 sen per share or net yield of 4.1% at current market price.

Source: Rakuten Research - 10 Sept 2019