Review

• Supermax’s 1HFY17 net profit of RM42.1mn (-45.5% YoY) missed ours and consensus estimates at 35.7% and 32.3% respectively. The deviation was due to reduced production output in 2QFY17.

• QoQ, while revenue declined 12.0% to RM236.7mn due to reduced production output, EBITDA was relatively steady, increasing by 1.8% to RM38.0mn. The reduced production output aroused from some of the group’s older plants which we suspect to be due to upgrading and maintenance works as was conducted in 1QCY16.

Impact

• With lack of clarity on the group’s glove capacity expansion progress, we conservatively remove our capacity growth projections. Accordingly, our FY17/FY18/FY19 earnings are cut by 7.8%/16.5%/16.2% to RM108.4mn/RM122.4mn/RM129.1mn.

Outlook

• Catalyst for the group’s near to medium term growth hinges on longawaited progress of its glove capacity expansion projects, namely, the Glove City in Bukit Kapar with 31.7bn gloves/annum and the Integrated Glove Manufacturing Complex in Serendah, Selangor with 15.5bn gloves/annum. As for the group’s contact lens venture, we gathered that it had begun marketing in North Asia and returns are only expected in the longer-term.

Valuation

• Our TP for Supermax is reduced to RM1.90/share (from RM2.15/share previously) pegged to a PER of 11.0x which is close to 1 S.D. below the stock’s 5-year forward PER of 14.5x. The discount is premised on our softer earnings growth outlook for the group. Accordingly, we reiterate our SELL recommendation on the stock. Sustained improvements in subsequent quarters and visibility on progress from expansion would be a re-rating catalyst for the stock

Source: TA Research - 27 Feb 2017