The way I see it
SUPERMAX SHARE PRICE CRUMBLES – TO SELL NOW OR TO BUY MORE?
omione
Publish date: Wed, 18 Nov 2020, 09:35 AM
omione
0 17
I am a top-down-bottom-up investor. I spend time reading news from around the world to understand the facts and reasons behind the stories. This helps me discern the shifting sand of world economies at any point in time. It is integral to my stock selections. I use fundamentals to regularly update stocks on my watch list that have the potential to outperform. I make full use of technical tools to determine the timing of entries and exits.
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There is an undeniable truth in the stock market. When one sells the shares, others buy on the other end. Both can’t be right at the same time, or can they?
******
Why is Supermax share price falling?
A simple answer is, more sellers are willing to sell at lower prices than buyers are willing to buy at higher prices.
Oh, give me a break. Everyone knows that. You’ve got to do better.
Okay, how about this? People are selling because the vaccines are coming.
Now, this is getting somewhere. But what has vaccine got to do with people selling down Supermax share price?
Well, this question is a little more complicated to handle. Generally, the investors believe that Covid-19 vaccines are the panacea that will finally defeat the Covid-19 pandemic. Without the pandemic, the demands for disposable gloves will crumble. The Average Selling Price (ASP) of gloves will fall, and so goes the earnings. Since the stock market is supposed to be forward-looking, investors have this incredible telescope that can look into the future. Having seen with their telescope what the future has in store, the smart investors start to sell Supermax shares today to beat others less clever than them.
Hmmm. This kind of makes sense. But how did the price of gloves get bid up so high in the first place since March 2020? Didn’t the investors have the same incredible telescope that allowed them to look into the future? Didn’t they see then that the Covid-19 pandemic would eventually come to an end just like every other pandemic or epidemic in the past? Since the stock market is forward-looking, shouldn’t the investors have known in March 2020 that these super-profits would end?
You see, there are smart people around. Sure. These smart people actually saw with their incredible telescope into the future way back in March 2020. They saw that the pandemic would eventually end. They also saw that Supermax profits would rise, then taper until the profits normalize. But they also saw that there was such thing as sentiments in the stock market. Since they are so smart, they knew that the forward-looking stock market perception is only jargon. They can make use of this jargon to manipulate the investor sentiments. They understand that the stock market, in the short-to-medium term, is actually driven by sentiments and nothing else. When the sentiments for Supermax become favorable, a tidal wave follows. Buyers will bid up the price higher and higher. Then, we will have another rally.
So who drives the sentiments? Is there a driver driving the sentiments, just like a driver driving a car or a truck?
Yes, there is. A driver called news is driving the sentiments. I read a research paper written on this subject by some smart investment researchers in America years ago while preparing for my CFA exams. Believe it. News drives sentiments, but sentiments drive Supermax stock price.
I see. News, huh! Now, a fusillade of vaccine news is driving negative sentiments, dampening the Supermax stock price. Does it mean Supermax stock price is sliding down the chute of no return?
Not necessary. This is not how the stock market works. You see, while the average investors (mainly the amateurs – the not-so-smart ones) fear volatility, the smart investors actually relish volatility. Without volatility, there will be no trading profits from the stock market.
Gosh, this is getting confusing again. With volatility, the stock price goes up and down. There will be losers and winners. The smart investors entice the not-so-smart investors to sell at low prices and entice them to buy at high prices. Does this not make the stock market a casino?
Casino? Yes and no. It all depends. There is one factor that many investors are sort-of knowing, yet not knowing it. It is called earnings or profits! This is the constant in the equity investments, be it equity in the stock market or equity in the other non-public markets. In the stock market investment, it is difficult to predict what the sentiments may be. The incredible telescope the so-called-smart investors use to peep into the future is sort of blurry from the front view but, the back view mirror is always clearer. So, super successful investors instead focus on earnings, earnings, and earnings. So long as Supermax continues to rack up higher and higher earnings, quarter after quarter, these super successful investors tend to ignore the short-term noises. The noises are the sentiments driven by the daily news flow. So if investors focus their investment strategy on sentiments or noises, they can lose money like in a casino. But if the investors can focus on the earnings and filter out the noisy sentiments, the stock price will invariably follow the earnings. As the earnings continue to grow, so goes the size of Supermax equity. As Supermax becomes wealthier because of growing profits, so goes the stock price. So it doesn’t matter what price you buy. In the long run, the price will always catch up with the growing profits. When this happens, the news will drive positive sentiments to lift the stock price.
But vaccines will dampen demands for gloves, driving down ASP and profits of Supermax?
Again, not necessary. So far, only 2 vaccines have claimed to be 90-94% effective. We expect the Chinese vaccines to claim similar efficacy within a matter of weeks, if not days. The 3rd stage trials are still not completed. The FDA cannot license the vaccines for mass vaccination until data from the 3rd stage trials become available. For now, the FDA is likely to approve the vaccines only for emergency use. The number of people who will be vaccinated under emergency use will be small. Until the masses (“masses” means world population) are vaccinated with effective vaccines, we will not see the end of this pandemic. There are 7.5 billion people on earth. Considering the principle of herd immunity and the accepted protocol to-date of 2 doses per person, mathematically, the world will need 10.5 billion doses to get us through this pandemic. No one really knows how long this process will take. There will be hiccups along the way. Vaccines may not work as effectively as advertised. Rumors and conspiracy theories may instigate some to rebel against vaccination. Logistic may hinder vaccination in less developed countries. The Covid-19 virus may continue to infect those with vaccinated immunity. A host of other problems may arise along the way, prolonging the pandemic for years to come. Manufacturing and the logistic of distributing the vaccines take time. Educating the masses to accept the vaccines takes time. The scale needed to stamp out this pandemic worldwide is just too massive. Don't expect the pandemic to go away anytime soon. It will take years even with the advent of vaccines. The truth is the world needs disposal gloves for many more years to combat the pandemic. The heightening demands for Supermax gloves will still be there tomorrow, the day after, the month after, and the year after. I am certain that the market will come to terms with this truth as Supermax earnings continue to grow quarter after quarter.
So, does it mean that better days are still ahead for higher Supermax stock price? If that is so, isn’t the vaccines stories kind of gotten ahead of themselves?
Without a doubt, earnings growth will continue to be the main engine driving stock prices higher. But, there is another constant in stock investing, and that is sentiments. Sentiments always get ahead of reality. The vaccine sentiments driving down Supermax stock price are no exception. They will blow over. Supermax earnings for the next 3 to 4 quarters will grow higher and higher as demands and ASP continue to rise while Supermax expands its capacity. 1Q21 earnings are already at Rm800 million. There are widespread disclosures from the glove manufacturers that the earnings reported so far have not fully accounted for the still rising ASP. As such, we can expect the 2Q21 earnings to come in at Rm1,000 million. The new capacity will easily boost 3Q21 to 1,100 million and 4Q21 to 1,200 million. Should these conservative projections materialize, Supermax FY21 earnings will be Rm4,100 million, giving it a sterling EPS of about Rm1.60. At the current price, this EPS represents an extremely undemanding forward PE of 5, making Supermax a compellingly undervalued stock despite its proven growth trajectory.
So, should I buy more Supermax shares now, or should I sell like other investors?
Well, as I said earlier, in general, many investors are sort-of knowing, yet not knowing about earnings. I shall leave the question to the individual investors to decide. It is not possible to teach old dogs new tricks. There are only 2 groups of investors – the smart ones and the not-so-smart ones. I know for a certainty that those smart, big-time investors are collecting Supermax shares to make a killing when the sentiments swing in its favor in a not-so-distant future. The not-so-smart investors are selling, fearing that the price will crash to nothing by the vaccine stories, irrespective of what you tell them about earnings. So, are you smart investors or not-so-smart investors? Look yourself in the mirror and chant, “Mirror, mirror on the wall. Who is the smartest of them all?” :) :) :)
Disclosure: I wrote this essay as a teaser (satire). But there is a lot of useful information an investor can glean from it. Please read with discretion.
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Discussions
13 people like this. Showing 22 of 22 comments
Great sharing bro. Just hope ppl read through and thoroughly understand your message. I definitely agree with your views but it is sad some investing public are sentiments driven rather than focusing on Smax potentials. Well to each his own. But keep up the great work.
2020-11-18 10:42
Good write up.
Simple and on the spot.
It's really up to individual investor to decide their entry & exit.
Long term investors > 5 years normally do well.
Unlike KYY who is not an investor as he seems more like a trader which I do not recommend as there is volatility in the short term nature of glove stocks and pharma stocks.
2020-11-18 12:51
lol..good analysis. A friend of mine who has been investing for the last 30 years offered his telescope. Just to share.
The share price of supermax in near term will be depressed. Why?
The IBs are trying to keep it ranged bound in anticipation of its inclusion in FBMKLCI component stock in Dec 2020 when a review is due. When it is included, many institution and foreign funds can then have a mandate to invest coz these funds have to follow certain rules like minimum market cap, earnings, liquidity, valuation, index linked..etc. If the price is allowed to sky rocket now, it may be less attractive for these funds in terms of valuation when they want to come in. So IBs will not earn brokerage from their corp dealing team to transact for these funds. At the same time, the IBs are slowly accumulating now at depressed price so they can sell to these funds later at higher price and make more money, in addition to their brokerage dealing fees.
What next after inclusion in FBMKLCI and becoming index linked?
Institution and foreign funds will come in, and they are not stupid either. They will make their presence known, pushing the price higher. After accumulating, they will then recommend the stock to their network of high networth private clients worldwide. They will then distribute their shares to these private clients and our local ikan bilis progressively, at the same time Supermax will announce higher Q results and IBs will assist the push by coming up with higher and higher target prices, pushing the price higher for these funds to distribute.
When will the frenzy end ?
These funds will time their distribution such that they finish their distribution close to vaccine being approved by FDA for mass use ( around March 2020, just a guess according to my friend, actual date may vary). When the announcement is made, the price will nose dive leaving the retailers who chased high and bought from them roasted.
My friend told me he has seen this pattern / cycle many times in his 30 years of investing career. Just sharing his telescope. please feel free to criticise and offer your views, no offence will be taken.
P/S : What happens if FBMKLCI inclusion is not successful ?
May be dual listing in HK, Spore as a back up plan is in the pipeline, who knows.
2020-11-18 13:23
@pharker, good sharing. Excellent addition. Funds managers will have to invest within the scope of their respective investment policy statement.
2020-11-18 15:57
Supporting this article with another great article in another platform.
RUBBER GLOVES - Preflop pocket aces & your opponent went all in. Do you fold?
It's now 1 week post Pfizer vaccine news. Moderna just came out with further positive news on their trial results. A successful Covid vaccination is a good thing, we should celebrate that the pandemic will soon be over. But, how soon is soon? And is it game over for rubber glove play?
In the image attached, I have updated the latest "apple to apple" peer analysis of the first and second tier rubber glove players in Malaysia (and a Thai glove manufacturer Sri Trang). It's divided in 2 parts, one is if we "simply" annualise (x4) the latest quarter, while the other is if we "simply" annualise the latest 2 quarters / half (x2) - an exercise to guesstimate earnings in 2021 & perhaps beyond. It's worth noting that last checked, ASP is still on the rise, as global second wave of COVID19 is happening so there may be a case to use simple annualisation on the past 2 quarters.
And what do we see? We see an industry average PE of around 15x. In my opinion, this is cheap. Recall, this is an industry of which
1) We have earnings visibility of around 1 year
2) There is a windfall of cash as deposit has been paid up front to secure orders
3) Demand & supply imbalance that will continue to be inelastic until at least end 2022 / early 2023
4) This will lead to prolong elevated ASP level which cause fat margin.
5) Explanation of 1-4 is sector specific and if we compare valuation of rubber glove vs some tech stocks across varying value chain - glove’s fundamental is better and is relatively undervalued.
There is a global effort to produce a vaccine as fast as possible. Even if this is the case, when’s the earliest that it can be mass produced? What about getting it administered to a sizeable portion of global population? Rubber glove is now in the phase which is the most volatile. The part where the industry will be tested against the test of time.
We are seeing money flowing from healthcare stocks to recovery play, this is all fine and well. I personally have diversified too, but how many of those recovery play can be backed by a certain visible profit and cash? At the end of the day, stock investment needs to fall back to the fundamentals and in the glove industry, we are pre-flopping a pocket Aces in terms of fundamentals. Why do you think more than 15 players in KLSE are moving into glove? Willing to take hundred millions of risks of investment? It's because they would like to have a scrape of the supernormal profit, even if it's at the tail end of 2022. Rerating of glove feels like it has already happened, but it's premature, in my opinion.
A note on glove newcomers, we see alot of daily trading volume in some of the names. Some names are being valued close to the 2nd tier names that's already operating with all relevant CE or FDA certifications. I personally don't believe its so easy to just plug and play. The profit estimates being flashed around are also taking the combination of the most bullish scenarios. If these newcomers can achieve such profit without the economies of scale, ability to manage production without downtime and at full efficiency, best ability to negotiate with clients, etc - then by the same logic you should bet on the first tiers of making even more extraordinary gains on the basis of profit per glove! What I’m saying is, if u think you are rationally investing in some of these counters, esp those that had gone up a lot in price, your money’s worth at investing in the first tier counters at current prices makes a lot more logical investment.
Stick to the blue chip in the industry. If you have zero holding of gloves, it's a good time to buy & invest some for your portfolio. There’s a room for rubber glove in any portfolio.
There should be another round of selloff this morning from Moderna vaccine news. The fear is reaching the peak. Those trading Or having 0 position can consider to enter. Personally I like RIVERSTONE. It’s trading at 12x PE & it has dual engine of growth from healthcare & cleanroom glove. Rondy.
2020-11-19 09:30
Good article. During MCO THE PRICE IS SO HIGH. AT THIS MOMENT I WILL NOT SELL, BECAUSE DEMAND OF GLOVE IS HIGHER THAN EARLIER.
2020-11-19 10:07
Quality write-up here. Reasonable-minded and considers different angles.
I feel we often tend to focus too much on the business aspects. No doubt there will still be strong demand for gloves despite the vaccines being available. And Supermax will continue to benefit from this.
However, we must also give attention to things like investors selling to lock in profits. After the excellent run price-wise where records were created, there is bound to be consolidation. Despite gloves counters arguably being the best business to be in during times like this, upside potential has now become limited.Many investors don't just look for dividends and bonuses but also capital gains, and they want to free up some capital for other opportunities. Whatever these may be. And so they liquidate a chunk of their Supermax shares, bringing the price down.
2020-11-19 19:02
Philip ( buy what you understand)
Wonderful use of the word fusillade, I think you are the first in the history of i3 bloggers to use such a word. Commendable.
However in investment, we need to use facts and figures, and we need to look at the downside risk before looking at the upside.
What are facts.
During a normal year, and with normal competition levels, supermax makes 100 million a year. This is the benchmark.
During the onset of covid-19, due to emergency use the earnings went up to 400 million. This is the treading water mark.
During the peak period of emergency, earnings in latest quarter went to to 800 million. This is peak emergency water mark.
So using this as our risk profile, it will definitely not be going down in the short term, but will continue up.
But what are long term GUARANTEES?
1. Spot prices and demand still not last forever. All the competitors are ramping up supply. New production from new manufacturers are coming in (at, mahsing). How long will they take to get their production up? 6 months? 1 year? 2 years? How about China production, and local Brazil competitors? In the long run we will have oversupply. Guaranteed.
2. You are using 1 quarter to project how many years of earnings? Right now the asking price for supermax is 21 billion. If you are buying at this price you are accepting the possibility of earnings to exceed this valuation. So: what is already priced in at this price point? Lets say you use your 4.1 billion earnings. That would be 5 years of covid-19 with no new competitors and no production increase by the existing competitors. If you are projecting 5 years of this covid hell, I think the country itself may fall. So, what is your margin of safety? If you assume 2 more years of all time elevation before normalization:
2 billion (existing net worth) + 4.1(2021) + 4.1(2022), your base valuation would be 10 billion. Margin of safety would then day normalization demand to be 3x of normal year or 300 million earnings per year moving forward post (2023). With this safer valuation, you would be looking to pay at least 11b or rm4 per share of supermax for it to hit minimum risk profiles. Reduce your risk, increase your gains.
With the expectations of multiple vaccines from multiple countries coming out, China already starting wide spread vaccine testing in Brazil, we can look towards 2021 for the last year of supernormal profits before normalization, meaning the minimum risk threshold for supermax becomes rm3.
So you can invest at 7,8 or even 9. But you need to know the size of the bubble, and your minimum risk levels to take.
But judging the future earnings without doing comparative growth analysis of all their comptia l competitors is irrational.
2020-11-20 07:20
Personally, I think you are a taad bit too optimistic. Even by picking up the highest target price of all bank analysts, namely Affin Hwang with the target price of Rm16.40 - Their estimate net profits are 2,988.7m (2021E), 1,249.3m (2022E), 1,205.9 (2023E). It's no where near the 4.1b per year you estimate.
2020-11-20 11:02
@Philip (buy what you understand), @Mat Cendana & @Devilsadvocatee: Thanks. I hear you.
2020-11-20 14:52
Long term guarantees on profit visibility..how many company can give that kind of assurance ? lol
Even the best of the blue chips cannot give you that kind of guarantee.
2020-11-25 04:23
With technology evolving at such pace, who knows may be in 5 years time they may come out with a spray coating combining nano technology and polymer science that cover your hands..thus making medical gloves obsolete..just stretching imagination.
2020-11-25 04:31
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Interesting article. Good work . Thanks !
2020-11-18 09:58