We attended Supermax (SUCB)’s analysts briefing  yesterday  and came away  feeling  positive  on  the  company’s  growth  prospects.  The  gas supply  issue  for its Glove City  has been resolved  while  the expansion of its new business park is taking shape. We reiterate our BUY call, with our FV unchanged at MYR3.01, based on an existing 12.0x FY14 P/E.

• New plants on track.  SUCB’s two  new  plants  –  namely Lot 6058 and Lot 6059 in Meru, Klang  –  are well on track  to be fully commissioned  by end-2014.  Upon full completion, both plants would boost  the company’s nitrile production capacity to 12.3bn pieces.  This  will shift its product mix to 53% nitrile vs 39% currently.
• Glove City  to  take  off.  Recall that  in 2011, SUCB intended to  build  six new factories in Bukit Kapar, Klang in a development called Glove City, which  was  subsequently  put  on  hold  due  to  gas  supply  issues.  On  a positive note, management confirmed that the infrastructure is already in place and Phase 1 construction is slated to commence in 1H2015.
• Business  park  to  take  shape.  SUCB  is  also  embarking  on  an expansion plan to build an integrated glove manufacturing facility called Supermax Business Park in Selangor. It will involve construction in two phases  with  Phase  1  expected  to  be  carried  out  from  2014-2018  and Phase  2  from  2019-2022,  with  total  installed  production  capacity estimated at 15.5bn pieces per annum.
• Muted  impact  from  electricity  hike.  Management  stated  that  the electricity  tariff  hike  on  Monday  would  incur  an  additional  cost  of MYR3.5m,  which  it  believes  can  be  easily  passed  on  to  customers. Additionally,  SUCB  is  also  looking  into  renewable  energy  as  an alternative  source  to  electricity.  We  expect  any  forthcoming  hikes  in industrial gas prices will be mostly passed on to customers.
• Maintain BUY.  All in, we are  optimistic on SUCB’s extensive expansion plans  as  we  believe  that  this  will  boost  the  company’s  market  share moving  forward.  Reiterate  BUY,  with  our  MYR3.01  FV  (unchanged) pegged to an existing 12.0x FY14 P/E,  in line with the stock’s  12-month historical average P/E.

Corporate Highlights 
New  plants  on  track.  The  company’s  two  new  plants  –  namely Lot 6058  and  Lot 6059 in Meru, Klang – are well on track to be fully commissioned by the end of 2014. Upon  full  completion,  both  plants  would  lift  its  nitrile  glove  production  capacity  to 12.3bn pieces (from 6.9bn pieces). This will shift its product mix to 53% nitrile vs 39% currently.  Moving  forward,  management  guided  that  net  margins  would  remain around 10-11%, which we believe could be further  enhanced  in view of SUCB’s  fully automated  production lines,  which would lead  to improved production efficiency and productivity.  

Glove City ready to take off. SUCB initially planned to set up six new factories on a 36-acre  piece  of  land  in  Bukit  Kapar,  Klang,  in  a  development  called  Glove  City. Construction was slated to commence in 2011 but was put on hold due to gas supply shortage.  On  a  positive  note,  management  has  confirmed  during  the  briefing  that ground  works  (ie water and natural gas supply)  are currently in place and  Phase 1 construction  will  commence  by  1H2015.  Upon  completion,  the  total  installed production capacity of these six plants would be 24.6bn nitrile gloves per annum. The expansion, which will incur a capex of around  MYR550.0m, will be carried out over a period of 10-12 years.

Further details on its business park. Meanwhile, SUCB announced on 11 Nov that it  has  acquired  a  100-acre  land  plot  in  Serendah,  Selangor.  The  company  aims  to build  an  integrated  glove  manufacturing  complex  (IGMC)  called  the  Supermax Business Park as part of its capacity expansion plan. Management shared that of the 70% of the land that will be utilised, 60% will be  allocated for its IGMC, and the other 40% for glove-related supporting industries. The remaining 30% of the land would be allocated for infrastructure and landscaping.  

The business park will involve the construction of two phases. Phase 1, which will be carried out from 2014-2018, will include the construction of 28 production lines with a combined  installed  capacity  of  10.9bn  pieces.  Phase  2,  which  will  comprise  12 production  lines with  a combined  capacity  of  4.6bn pieces, will be carried out from 2019-2022. Management has allocated MYR700m-750m capex for its business park. Note that construction will be carried out over a period of nine years. Given SUCB’s strong  operating cash flow of  ~MYR160m  per annum, we believe  the capex  funding will not  be  an issue.  Moreover, management has stated that the land allocated for glove-related supporting  industries  has  a  gross  development  value  (GDV)  of  up  to MYR400m and will be completed in  the next 3-5 years,  which will also help partially  fund its capex.

Muted impact from electricity hike.  It  was announced on Monday  that effective 1 Jan  2014,  the  electricity  tariff  for  industrial  consumers  such  as  the  rubber  glove players  would increase by 16.85%  from  33.5sen/kWh to 39.0sen/kWh. Management has  stated  that  the  hike  would  incur  an  additional  cost  of  MYR3.5m,  which  the company  believes can be passed on to customers. We believe that the impact of the electricity  hike  on SUCB is  minimal as electricity cost only accounts for 2-3%  of its total  production  cost.  Additionally,  SUCB  is  looking  into  renewable  energy  as  an alternative to electricity. We also expect any forthcoming hikes in industrial gas prices to be substantially passed on to customers.

Risks. Key risks include: i) a surge in raw material prices, ii) decreasing ASPs due to intense competition, and iii) delays in its expansion plans Maintain BUY. Overall, we came away from the briefing feeling optimistic on SUCB’s extensive expansion plans,  as we believe that this will help to expand the company’s market share moving forward and in turn, perk up earnings in the foreseeable future. We continue to like the company’s growth prospects given the favourable operating environment of: i) easing raw material prices; ii)  increased production capacity,  and iii)  increased  automation  in  its  facilities  which  could  improve  production  efficiency. Hence,  we  maintain  our  BUY  call  and  MYR3.01  FV,  pegged  to  the  existing  12.0x FY14 P/E (in line with the stock’s 12-month historical average P/E). 

Financial Exhibits

SWOT Analysis

Company Profile
Supermax  Corporation  is  an  investment  holding  company  whose  subsidiaries  are  principally  involved  in  the  manufacturing  and distribution of medical and rubber gloves.

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Source: RHB