We came away from Supermax’s briefing feeling more confident aboutthe company’s prospects – in particular, it would be accelerating itsglove and contact lens capacity expansion, which would supercharge earnings growth in the next five years. Maintain BUY with an upgraded MYR4.50 TP (from MYR3.84, 33% upside).

Plants 10 & 11 update. We are pleased to note that eight out of the 20 lines in both plants are operational. Management has said it aims to commission the remaining 12 by end FY16 (Jun), which would add a total of 6bn nitrile gloves capacity. Subsequently, the product mix would improve to 55%/45% nitrile/latex (FY15: 39%/61%) respectively.

Glove City next. On the back of robust global glove demand where localmanufacturers have gained larger market share, management unveiled the revamped Glove City project at Bukit Kapar where it intends to add 31.7bn gloves capacity by FY20 (1QFY16: 20bn). The project would entail four factories, where each new factory is to be built upon the completion of a previous facility to ease oversupply fears. Management is confident that it can avoid similar delays that plagued Plants 10 & 11, as it has secured all infrastructure approvals related to the project.

Future vision. Supermax also shed light on the progress of its contact lens venture Supervision Optimax SB. Current production capacity is at 3.5m pieces of lenses pa, with a target of reaching 40m pieces pa by 2QFY17. Management also expressed confidence in breaking into thismarket, leveraging on self-developed patents and more efficient process designs, with an aim for this division to contribute to group topline and bottomline by end FY17.

Maintain BUY. We remain excited on Supermax’s prospects. We believe Glove City’s expansion plans would supercharge earnings growth over the next five years. Consequently, we upgrade our FY16-18 earnings by 7-13% respectively. Maintain BUY with an updated MYR4.50 TP (8% CoE, 2% TG), with an implied 20.1x 2016F P/E. Supermax remains the most attractive proposition in the rubber glove sector, from both P/E and PEG metrics (Figure 2), where we opine that the stock would narrow the 37% valuation discount to the sector average. The key downside risk would be the de-rating of the sector driven by liquidity, should investors switch out of non-cyclical stocks on signs of abating market uncertainty. Supermax is our sector Top Pick.

Vision For The Future We were impressed by our plant visit to Supervision Optimax SB, Supermax’s contact lens operations. In particular, we note management’s argument for the business (robust non-cyclical demand), competitive advantages (self-developed patents) as well as highly automated manufacturing processes. Although current operations are concentrated on the contact lens segment, we understand that Supermax has ambitions to add related eye care products to its products stable. We opine that, should the contact lens business succeed, it could be a welcomediversified revenue stream for the company.

Global contact lens sales exceeded USD7.5bn in 2014, according to The Cooper Companies Financial Reports – Market Data by Contact Lens Institute report, posting an 8-year CAGR of 8.75% (Figure 9).

Although management did not divulge any financial projections, our search on global manufacturers such as CIBA Vision (a subsidiary of Novartis International AG) and CooperVision Inc (a subsidiary of The Cooper Companies Inc) has indicated that comparable optical solutions have a GPM of around 52-54%. Our earnings project for Supermax does not include potential contributions from Supervision Optimax.

Supermax has also shared that it intends to leverage its global distribution network to help develop its contact lens business. This could potentially open the door on a global distribution network revenue stream as the company monetises its existing network to distribute third-party products.