Supermax’s  1HFY14 earnings came in below  expectations,  mainly due to  production capacity  loss  and  lower average selling prices.  With  the production  issue  at  its  affected  factory  fully  resolved  during  2QFY14, coupled  with  the  recent  commissioning  of  new  lines,  2H  may  look brighter. We expect FY14F earnings to be flattish due to the sluggish 1H performance.  We  lower  our  FV  to  MYR2.31  (from  MYR2.68)  and downgrade the stock to NEUTRAL (from Buy).

Below  expectations.  Supermax’s  1HFY14  net  profit  of  MYR53.4m (-21.4 y-o-y) came in below our and consensus forecasts,  mainly due tothe  output loss at one of its plants in Alor Gajah, Melaka, which  faced a production  issue  in  4QFY13.  This  was  only  fully  resolved  in  stages towards end-2QFY14. Besides, some capacity was temporarily lost at its other  factories  as  Supermax  resumed  its  scheduled  automation programme. Average selling prices  in 2QFY14 continued  to trend down by  5-20%  y-o-y  across  the  group’s  range  of  products,  in  tandem  with lower raw material prices (natural rubber latex price: -3% q-o-q; synthetic nitrile  latex  price:  -9%  y-o-y)  coupled  with  price  competition  in  the market.

Brighter 2H outlook. While Supermax’s 1H results were mainly dragged by  an output loss, we expect 2H to normalise and pick up, given : i)  thecomplete  restoration of the affected plant,  and  ii)  the commissioning of new lines at its new plants in Meru, Klang, with capacity starting to come onstream progressively (first batch of lines  was commissioned in August 2014).  Upon  full  commissioning  of  its  new  lines,  Supermax’s  nitrile gloves  production  capacity  could  double  to  12.3bn  pieces  per  annumfrom  5.4bn  pieces  per  annum  currently.  This  could  potentially  changeSupermax’s  production mix  to  53% nitrile:47% natural rubber latex  (from around 40:60 currently).    

Downgrade  to  NEUTRAL.  We  lower  our  FV  to  MYR2.31  (from MYR2.68), after reducing our FY14/15F earnings forecasts by 14%/11%, as  we  expect  the  weaker  1HFY14  to  drag  its  FY14F  full-year performance,  while  it takes time to  fully commission the new lines.  Our FV  is  pegged  to  a  12x  FY14F  P/E,  which  is  the  mean  of  its  historical trading band. 

Source: RHB