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Fret not. Supermax earnings for 3Q21 are on track.

In my blog post, Nov 18, 2020, SUPERMAX SHARE PRICE CRUMBLES – TO SELL NOW OR TO BUY MORE?, I forecasted the Supermax FY21 earnings to be Rm4,100 million or Rm4.1 billion. At that time, the average forecast among the ten investment analysts was Rm3.17 billion (see SUPERMAX – SHOULD YOU TRUST RESEARCH HOUSES? ). That average ranged from the low of Rm1.69 to 3.9 billion. My 4.1- billion forecast was so radical a number that some i3 readers didn’t mince words in their contempt.

My quarterly forecasts published on Nov 18, 2020, versus actual, were as follow:

The variance between my forecasts and actuals for the three quarters is just Rm46 million. As Supermax in its 3rd quarterly commentary asserted that had it not been for the Meru plant closure (and possibly, the shortage of containers as per the report by Hartalega on May 3) and the contribution to the government, I believe, my forecasts would have been on target. If Supermax can operate without further hiccups from Apr-Jun, will it not achieve Rm1.24 billion profits in 4Q21? I think it is more than doable.

If Supermax FY21 earnings come in at Rm4.1 billion as per forecast, the expected EPS (net of treasury shares) will be Rm1.56. At the close of the market today, Supermax price ditched to Rm5.57. The valuation of a 3.5 PE does indeed make a mockery of a supposedly efficient market.

What exactly is causing such mispricing of, probably, the most profitable listed company (in terms of EPS) in Malaysia? I think all the capable Sifu’s out there will have their explanations. I shall not venture there. Let’s leave it at that.

But why were my forecasts so much closer to the actuals compared to those made by the professional analysts? Luck, perhaps. Or could there be more?

When the price started to retreat in Aug 2020 despite the continuous strengthening of the earnings, I would say it was due to profit-taking.  The stock attempted two rallies on Sep 1 and Oct 15. Each time, they failed to break through the previous high. After that, the price continued to decline to Rm3.76.  The decline from Oct 21 to Apr 6 was in large part due to the fear of the arrival of vaccines. The investors (Supermax stocks are largely dominated by retail players) were afraid that the vaccines would crater the demands for gloves. This fear was consequentially egged on by the lies and misinformation propagated by the incompetent analysts as well as the big con like JP Morgan.

In my Dec 3 report, SUPERMAX BONANZA: HOW TO TREAD THE MINEFIELD TOWARDS IT, I laid out the facts and rumors at that time. I coined them “A bird in the hand” versus “Two birds in the bush.” The facts laid out then are playing out very accurately now. The covid-19 infection, as we all know now, continues to plague the world. The demand for gloves has shifted. Segments of the industries that never used gloves before are now using them. Glove demand has not cratered by the vaccines as feared.

So, what is holding back the Supermax stock price from rallying? The stock price has rallied from the low of Rm3.76 to the high of Rm6.48 – a whopping 72%. But what is holding it back from rallying even higher? The misinformation that is disseminating by the bears has now switched from vaccines to overcapacity. It is instilling fear and confusion among many investing players. I do not pretend that overcapacity is a non-issue. Every informed player should see incremental capacity coming. (Note: I use “incremental capacity” here instead of “overcapacity.”) Economics 101 teaches that when an industry experiences abnormal profits, competitions will eventually normalize them. Such a cycle afflicts all industries. At this time, the glove and semiconductor industries are experiencing outsized profitability. At other times, it was oil, palm oil, travel, etc. But stock prices will ride the waves of these ups and downs. So, the difference between “incremental capacity” and “overcapacity” is, it takes time for the glove industry to ratchet up to overcapacity. We are far from that.

It is precisely the issue of capacity, I believe, that sets my forecast apart from the pact of professional analysts. I expected the prices of gloves to taper gradually over time. But I also took into consideration that as prices of gloves taper, the production capacity of Supermax would also rise. The capacity increase offsets the effects of price tapering. This balancing act has played out in the Supermax 3Q21 earnings report. Despite the softening of ASP as reported by Supermax, the increased capacity sustains the 3Q21 profit vis-a-vis 2Q21. Had it not been for the Rm75-million contribution to the government’s pandemic fighting efforts and the Meru production shutdown, Supermax 3Q21 would have held out by the increasing capacity despite a lower ASP.

By the end of 2022, Supermax will have expanded its capacity to 48.425 billion, a 122% increase from pre-pandemic. I have not yet worked out any earnings forecast beyond FY2021. But based on the ballpark, I can safely expect that Supermax earnings will hover between Rm3 to 4.5 billion annually despite ASP tapering, at least for the next two to three years.

Stock prices do not often reflect fundamentals. Stock prices can detach from reality longer than investors can remain solvent. The stock market can be very fluid. With a still strong earnings visibility ahead driven by increasing capacity despite tapering ASP, my bet is still on Supermax to have another massive rally when all the stars align.

Will the next rally hit my target of Rm40? Let’s see.

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