Ultimate undervalue club
Why Supermax?
itjustabouttheprofit
Publish date: Sat, 23 Aug 2014, 12:42 AM
I am here to ANSWER a simple question. Why Supermax?
Strength
1) Undervalue (PE12.34 vs Harta PE23.01 vs Kossan PE18.03 vs Topglove PE16.3)
2) Explosive production growth in 1 year (5.4billion to 12.3billion) - 128% increase - highest percentage among top 4 glove maker
Expansion Plans
Expansion of Nitrile Latex Examination Gloves Capacity
Plants #10 and #11 in Meru, Klang are nearing completion and the Company has been working
with the relevant authorities to install and supply the necessary infrastructure and utilities. The
first batch of lines is expected to be commissioned within the 3rd quarter of the year. These
new plants will have lines that are built to be inter-switchable between natural rubber and
Nitrile glove production but have currently been earmarked for Nitrile in tandem with market
demand.
Capacity from the 2 new plants will be commissioned in batches starting from Q3 2014, and
when fully commissioned, it would increase the Group’s Nitrile glove capacity by 6.9 billion
gloves which is more than double the Supermax Group’s current Nitrile capacity from 5.4
billion pieces per annum to 12.3 billion pieces per annum. This increase in production
capacity will result in Nitrile Gloves forming 53% of the Supermax Group's total installed
capacity while NR Latex Gloves will form the balance 47%.
Though we anticipate competition would be more intense on Nitrile Glove, we have factored
into our budget with profit margins ranging from 9% to 11% from the increased revenue
generated by the additional capacity that Supermax Group would be adding to the market in
year 2014.
Thus, the additional capacity will not only enable the Group to reduce the lead times to meet
demand for Nitrile Gloves but also improve profitability through higher efficiency and better
productivity. In addition, the increase in production capacity of Nitrile Glove would contribute
NOT just to the Manufacturing Division in terms of additional new sales & additional profits,
but also provide additional new sales and additional profits to Supermax Group's overseas
distribution activities, providing additional income and increase in market shares of Nitrile
Gloves where the Group's overseas distribution companies operate.
Glove City Project
With fully-owned subsidiary Maxter Glove Manufacturing Sdn Bhd’s (MGM) development of
plants #10 and #11 in Meru, Klang, due to be completed this year, MGM will next move on to
its Glove City Project.
The entire project will encompass 6 manufacturing plants which will be built over the next 10 -
12 years. Each plant would have an installed capacity of 4.1 billion pieces. Construction of
the first plant is targeted to commence in year 2015.
Supermax Business Park Project
Supermax Business Park Project
Supermax has also acquired a large piece of industrial land measuring 100-acres in Serendah,
Selangor, to build the Supermax Business Park. The idea and vision is to create a win-win
situation whereby 60% of the land area will be used by Maxwell Glove Manufacturing Bhd
(formerly known as Seal Polymer Industries Bhd), a wholly owned subsidiary of Supermax, to
build an Integrated Glove Manufacturing Complex (IGMC) to produce nitrile gloves, and
the balance 40% of the land will be developed for the Supermax Group’s supporting industries
such as the chemical, packaging and porcelain/ceramic former suppliers, and engineering and
automation companies, to set up their operations here.
The 40% portion of land allocated for the supporting industries will have a Gross Development
Value (GDV) of RM350-400 million and is targeted to be fully developed within 3 to 5 years.
For the remaining 60% of the land reserved for the development of Maxter Glove
Manufacturing Sdn Bhd’s IGMC, it will be developed in 2 phases at a total cost of between
RM700 million and RM750 million with total of 40 production lines with production capacity
of 15.5 billion pieces per annum. Details are as follows:
2014-2018 (Phase 1)
Installed capacity - high capacity & high efficiency lines 28 - pieces of gloves 10.85 billion
2019-2022 (Phase 2)
Installed capacity - high capacity & high efficiency lines 12 - pieces of gloves 4.65 billion
The proposed manufacturing facilities will employ the very latest technology in nitrile glove
manufacturing which would make this the most advanced, efficient and productive
manufacturing facilities in the region. The acquisition will enable the Company to
aggressively expand its production capacities to meet the current and future growing demand
for nitrile gloves.
This is in addition to the capacity expansion which is currently being carried out by Maxter
Glove Manufacturing Sdn Bhd, another fully-owned subsidiary of Supermax Group based in
Klang, Selangor.
3) Profit margin increase due to production efficiency
Manufacturing and Process Automation
Most of the manufacturing plants in the industry, including Supermax’s plants, are already
highly automated. However, there are some remaining processes, particularly the stacking and
packing processes, which still require a lot of manual labour. The automation programme to
automate these remaining processes is being fast-tracked in response to the need to reduce
dependency on foreign labour. This process has invariably lead to some output loss but it is a
necessary step for future gain. (hint: This is the reason why Alor Gajar factory on fire??????)
Ultimately, this would enable the Supermax Group to further increase productivity and manufacturing
efficiency and remain at the forefront in terms of global competitiveness. In addition, all the new
manufacturing facilities would be fully automated and equipped with manufacturing automation
processes fully built-in as part of the capital expenditure.
4) Ebola boost demand on gloves
http://blogs.wsj.com/moneybeat/2014/08/06/ebola-outbreak-gives-malaysia-glove-makers-a-boost/
Malaysian rubber glove makers, the world’s biggest, are getting a boost from the Ebola outbreak in West Africa on speculation there’ll be a jump in demand for the products used to prevent infection.
The country is one of the world’s largest natural rubber producing countries, and the glove producers typically receive a bump when global health worries surface on bets more will be needed for medical procedures, and that companies will stock up as a precaution too.
Shares of the world’s largest glove maker, Top Glove 7113.KU 0.00% Corp Bhd., have rallied as much as 6.7% this month while competitor Kossan Rubber Industries 7153.KU +1.99% has jumped 5.2% and Supermax up 17%.
Analysts however are less sanguine about a sudden surge in demand, even as a second U.S. Ebola patient arrived at an Atlanta hospital Tuesday.
“While some glove companies have seen an increase in demand from the affected African countries, sales contribution from these countries is negligible, leading to minimal earnings impact,” CIMB analyst Eing Kar Mei wrote in a note this week. She says they’ll only be an impact on demand if there’s a significant rise in Ebola cases globally and a depletion in glove inventories.
Top Glove said in an email it has “noted growth in demand for natural rubber gloves, in line with the general uptrend from developing countries,” but said any rise in demand isn’t necessarily related to the Ebola outbreak. Africa contributes just 4% of Top Gloves sales revenues, said corporate communications manager, Michelle Voon.
“The potential is there but panic buying will only happen when it spreads beyond Africa and if the WHO (World Health Organization) declares something,” said Edward Yip, corporate affairs head at Kossan Rubber. “Even then, the main buyers will likely be from developed countries like the U.S. and Europe rather than from developing countries like Africa where glove consumption is low.”
The last time the glove sector experienced a surge in demand was after the World Health Organization announced a health emergency in April 2009 amid a global outbreak of the H1N1 flu strain, she noted.
Hong Leong Investment Bank meanwhile said it is keeping its “Neutral” rating on the rubber gloves sector as the virus’ spread has yet to reach the scale of the 2009 flu pandemic which caused about 280,000 deaths.
Still, current health concerns will be advantageous to Top Glove as the company has a greater exposure to the continent where latex gloves are preferred, analyst Tan J Young added.
5) Raw material such as rubber dropping tremendously as supply of rubber at new high
http://www.bloomberg.com/news/2014-08-17/rubber-glut-seen-shrinking-as-28-price-decline-deters-tapping.html
The global surplus of natural rubber will shrink 46 percent in 2015 as demand expands and farmers reduce tapping because of decreasing prices, according to the International Rubber Study Group. Futures advanced.
Production will outpace demand by 202,000 metric tons from 371,000 tons in 2014 and 650,000 tons last year, the Singapore-based body said in an e-mail on Aug. 13. The group said in May the glut this year would exceed the 714,000 tons in 2013 after it increased output estimates forThailand, the biggest shipper.
Futures plunged 28 percent this year, declining to the lowest level in almost five years in June. Supply increased after record prices three years ago spurred output, while demand slowed as the pace of economic expansion decelerated inChina, the biggest buyer. The glut is now contracting as profits decrease for small farmers who represent 80 percent of world supply amid forecasts for record global car sales.
“Small growers across producing regions have started responding to a consistent decline in prices,” said Lekshmi Nair, senior economist at the group. Farmers are showing less enthusiasm for tapping while tire demand is boosting usage, she said in the e-mail. The inter-governmental group has members from producing and consuming nations and industry.
Futures in Tokyo, the global benchmark, plunged to a five-year low of 190.3 yen a kilogram ($1,858 a ton) on June 5 after reaching a record 535.7 yen in February 2011. The January contract rose 0.3 percent to settle at 197.5 yen today, reversing a 1 percent decline to the lowest level since June.
Plentiful Supply
Global stockpiles are still expanding. Inventories will reach 3.79 million tons by the end of 2014 and 4.33 million tons by 2015, according to The Rubber Economist Ltd. Reserves will increase to the equivalent of 3.9 months of consumption at the end of 2014 from 2.5 months a year earlier, the London-based independent researcher said by e-mail on Aug. 15.
“We don’t expect to see an end of ample supply,” Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt, said in an e-mail. “Demand growth will find it hard to catch up. We do not see a major scope for prices to recover.”
World inventories were 2.9 million tons at the end of 2013 from 2.26 million tons a year earlier, study group data show.
“The continued decline in natural rubber prices and a slower-than-expected recovery in global demand as well as increased supply have led to an inventory buildup,” Nair said.
Production from growers representing 93 percent of global output dropped 1.1 percent to 5.83 million tons in the first seven months from a year earlier, the Association of Natural Rubber Producing Countries said on Aug. 6. The group represents the top producers including Thailand, Indonesiaand Vietnam.
Global sales of light vehicles, weighing less than six tons, are set to climb 4 percent to a record 90.5 million units next year, according to LMC Automotive Ltd., a research company in Oxford, England. Sales across Asia will expand 5.4 percent in 2015, it said in e-mail.
World production will rise 2 percent to 12.275 million tons this year and increase to 12.635 million tons in 2015, the study group said. Demand will expand by 4.5 percent to 11.904 million tons in 2014 and grow to 12.433 million tons next year.
6) World 3rd largest glove manufactor with website on various language throughout the world
www.aureliagloves.com - USA
www.supermax-brasil.com - Brazil
www.supermax-gmbh.eu - Germany
www.supermaxcanada.com - Canada
www.msd-europe.com - Belgium
7) Oversupply concerns appear overplayed, new capacity to drive growth in 2H2014.
http://klse.i3investor.com/servlets/ptres/23967.jsp
Tell-tale signs of oversupply concerns appear overplayed considering that capacity expansion of the four rubber gloves manufacturers under coverage are expected to be delayed and staggered. Kossan’s 5b pieces capacity will only gradually be ramped up starting from Mar 2014 (1st plant) and the other two plants will commence in 3Q2014 (net increase in new capacity for 2014 is 2.5bn pieces). Supermax’s new plant with an estimated 5.3b pieces will only start commercial operations end 2Q 2014 with an estimated net incremental increase of 2.5b pieces. Top Glove is scalling back and only expects 2b pieces new capacity by end 2014. Meanwhile, Hartalega’s NGC plant is only expected to commence commercial production by 4Q 2014 with a net incremental increase of 2.0b pieces by end 2014. If we sum this up, the new capacity is only about 9b piece, which is only 56% of new world demand (if we take global demand at 160b pieces of gloves and assuming a 10% growth, new demand is expected at 16b pieces) which accounts for less than 60-65% of Malaysia market share globally (bearing in mind all the four players under our coverage accounts for an estimated average 90% of production in Malaysia).
Weaknesses
1) Potential rise in electricity
2) EPF sell off recently (from 55million shares to 40million shares)
3) Cure for ebola -
http://www.businessinsider.com/man-cured-of-ebola-with-experimental-drug-today-is-a-miraculous-day-2014-8
4) Selangor water crisis
5) Foreign exchange loss (RM3.21 to RM3.15) - 2% decrease
Estimated EPS
Q2 2014 - 4.5sen (Most of the Alor Gajah factory production recovered)
Q3 2014 - 6sen (Alor Gajah factory production fully operation on June 2014, commissing of 2 new plants)
Q4 2014 - 7sen (Most of the new plant production complete commissioning)
Q1 2015 - 8sen (Full production on new plant - 6.9billion glove per year)
Q2 2015 - 8sen
Q3 2015 - 8sen
Q4 2015 - 8sen
Average PE among glove company = 17.42
TARGET PRICE (CURRENT PRICE: RM2.24)
- RM3.72 based on EPS21.41sen for FY2014
- RM4.88 based on EPS32sen for FY2015
DO RESEARCH BEFORE BUY
TRADE AT YOUR OWN RISK
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Discussions
3 people like this. Showing 36 of 36 comments
scenario=case study=assumption.
In this case, I assume Spmx worths PE 10x with estimation on eps 4.5x4=18 cents, thus I derived its fair value at RM1.80.
The pertinent questions are
i) how much does you value spmx? at PE7x?, 10x? 12x? or 17x ?
ii) how much do you estimate its eps? 4.5x4=18cents? 8x4=32cents ?
Good luck.
2014-08-23 11:32
I taking the average PE ratio among 4 top glove company in Malaysia, 17.42 {(12.34+23.01+18.03+16.3)/4}. Our glove company have a multinational company. Hence using PE10 is just not a relevant basic. PE10 only use for the company which is small and more localize company.
2014-08-23 11:52
No point one. Epf will throw again and again when it start to move up unless got very strong foreign fund which can absorb. Otherwise, retail investors are too tiny to push the price up to where it suppose to be
2014-08-23 11:59
why epf is keeping dumping shares from time to time??.,since the supermx look bright in next year and their share price is fair and cheaper among them,is it worth to accumlate now ?.
2014-08-23 12:12
At PE 10, which seems low to me, if eps 18 cents ok, fair 1.8. If they do eps 24 cents, that's 2.4 at low PE. If as it said here next year can expect eps 32 cents, then even at PE 10, that's 3.2 myr. That's 30% MOS for investors who can hold a year. I doubt PE 10 is fair. PE 12 seems fair but as u all say, it depends on what u are willing to give as premium to supermax. Quote ideally the question is, can they generate eps of 8cents. Anyone studied these guys well enough?
2014-08-23 14:24
The downside of this counter is, it's a political play with epf. As the founder is pro Pakatan, epf could purposely control the share price from shooting too much by going in and out on this counter.
2014-08-23 14:26
If you think it is "undervalue", use TA to time the entry. In actual fact,
the counter is in "downtrend" now ! so not the right time to buy. LOL
2014-08-23 15:24
Look at a bigger picture, glove industry is close to be a commodity thing, yea maybe one firm can differentiate it's glove from other through technology like thinner but in the long run, as long the technology isnt patented, everyone can enjoy it, so the selling price is more or less dictated by market demand, no buyer will say oh I prefer Supermax glove over Topglove or others.
With that in mind, the firm that can win is the one with the lowest cost, either from raw material or management efficiency or other ways. Now you have to ask, Hartalega being the one with best profit margin in glove now, does Supermax has the ability to make glove at a lower cost than Harta? This is important because if one day Harta decide to go to war with Supermax, Harta can virtually lower their selling price to the point Supermax cant make any money due to higher cost. Although that isn't a likely scenario.
In spite of saying that, you can still make money from their shares, they take more loan or raise more money, buy land buy factories, produce more gloves, naturally revenue will rise, share will go up, and repeat.
2014-08-23 15:32
MY personal opinion is go for the leader in the industry with the best ROE and margin. OF course now harta is consider fairly or overvalued. Unless Supermax is super deeply undervalued. Nothing wrong with predicting EPS or a fair PE, but the market decides the PE, whether you think PE 10 is too cheap, the market can make it stays at PE 10 for many years.
2014-08-23 15:43
JT Yeo: thank you very much for speaking out what I have in my mind but do not want to spell out directly. You know the industry very well. You are great. Thks.
2014-08-23 16:13
JT Yeo: Yes maybe now harta has the highest profit margin in the glove industries but Supermax is catching from the back. Just for your info, Supermax now on the process on transforming all of the human-dependent machine to high automated machine. As investor, we are now seeking for the best capital appreciation. Hence, for now, if you wan to appreciate your capital to the maximum, invest in Supermax as the EPS will be skyrocketing in 1 year time as the company now in the way to transform to highly automated machine.
2014-08-23 17:10
In glove industries, you cannot make an assumption that your company will always be the market leader. Market leader now not necessary is the market leader for future. As investor, we are seeking the best way to appreciate our capital. Hence looking for the percentage of EPS improvement is the best way to increase your capital.
2014-08-23 17:14
yea i suppose if you hold Supermax for the short term, perhaps you can make some money. You are right Harta might not be a leader forever then you gotta come out with something solid that Supermax can overtake Harta. Well it depends, if FCF is weak, EPS skyrocket will come at the cost of share dilution or high borrowing cost, that would cancel out the gain too.
2014-08-23 17:28
My opinion is dont worry too much about EPS or PE, study their competitive advantage. If you are obsessed with EPS, give your estimate 30-50% discount. Supermax keeps a record of all the research house that cover their shares. Several research written at the end of 2011 estimates the EPS for 2011, 2012 and 2013, on average their estimate is off by 8-10%.
As for PE, CIMB Analyst Terence Wong, a CFA gave a TP of RM3.76 at the end of 2013 based on PE of 13.5, a 30% discount to Harta's PE back then, Supermax was trading at RM2.67 back then, hit RM3+ in January and downhill. Not saying anything bad about him, and he did make some right TP before, but it tells you a professional analyst with all information at hand can get it wrong too, thats how hard it is to make estimate. If professional can be wrong while giving a 30% discount to Harta's PE, taking industry average PE of 17 is very optimistic when Harta's current PE is at 22 now, 30% discount should be PE 15, and you can still be wrong at PE 15 just like Terence Wong.
So if you estimate EPS of 21.41 for 2014, give that a 10% discount, make it 19.26. For PE, give it a 40% discount to Harta's PE 22, that will be 13.2. So EPS 0.1926 cents x 13.2PE = RM2.54. That will be more in line so you have more margin of safety if anything goes wrong.
2014-08-23 18:17
Thx both. Yes n No answer. Nothing right ot wrong.
I would say PE13 for supermax is quite fair based on current market.
Agreed with writer- buy at your own risk n I think he did a good job!
2014-08-23 19:59
You understand the industry very well and had made very logic and good assessment. Although this does not guarantee 100% accuracy, at least we have used our best know-how to assess. I believe you must able to make good return if you have investment in gloves counters. Today, I am lucky to have chance talking to people who really know the industry.
Good luck.
2014-08-23 20:02
Anbz? What point are u exactly trying to make? That if u support PR u r arrogant?
2014-08-24 09:09
Agreed with anbz. If you want to invest, stay out from politics, or at least do not openly state your preference either PR or BN. Look at our poor uncle, he invests heavily in mudajaya, yet he openly declares he bought muda on margin finance, his support for PR is not a secret, mudajaya has been deprived of infra jobs for 23 straight months as a result. Lessons learnt, stay out from politics if you want to be in the investment game. Do you think the local government hospital would ever be allowed to use supermx gloves? If they do, do you think our UMNO friends would keep quite?
2014-08-24 10:42
well mudajaya is heavily focused in malaysia and involve in industry that have to go through government, gloves are more of an export business, so wont be that bad
2014-08-24 13:42
I do not think Harta is overvalued and Supermx is undervalued. Quite the contrary, I believe Supermx is quite fairly valued, if not already fully valued. The 'Big Four' gloves manufacturer, I may arrange in this sequence(from best to bad), Harta,Topglove, Kossan, Supermx(at least for the time being)
2014-08-25 15:03
PE23 not overvalue but PE13 already fully value. What is this world? Look at topglove, PE16, Kossan PE18, Supermax PE13. Is it PE23 better than other company? What is the basic that you say supermax is the 4th best among top 4 glove? Do you study what happeningnto aupermax? They reducing the quantity due to the fire not becauae they cannot compete with other. Hence it ia invalid to aay that aupermax is the 4th among them
2014-08-25 16:01
If u invest based on the market price performance, then your earning will be limited
2014-08-25 16:03
Hello, pingdan, let the time proves itself, say 2 years after from now on which will have better performance in terms of market price as well as profitability.
2014-08-25 16:34
Anyway, anyone know what is the competitor advantage of harta? 1st producing nitrile glove which is higher margin than rubber glove (They producing 100% nitrile yield). Second they do not have any bank borrowing which make cost save on interest. 3rd they using automated machine which is less dependant on staff cost. 4th they have the lightest glove in the world. Other than that, harta is the world largest nitrile glove producer.
2014-08-25 16:49
I dun know what will happen in 2years time. Among top 4 glove, Supermax will adding the most glove in term of number of glove and.percentage in 2014 compare to other 3. Also, Supermax having a inter-switch machine between rubber and nitrile glove. Imagine what is the growth percentage in term of EPS in 1 years time? Other than the EPS factor, PE also undervalue. Now, Supermax are heading to add more production in nitrile glove. Hence I think the profit margin will be improve and highly automated machine will further improved the profit margin. Hence 2014 is the year for Supermax!
2014-08-25 16:55
never mind. Result coming out this week. Let's see how it's performed. Good luck!
2014-08-25 22:26
With the latest 2Q result of 3.93 cents, your estimation of 4.5 cents is already off by 14.5%. Not saying you are wrong and im right, just saying again estimating EPS is a very tricky math, unless the business itself has a strong record of stable earnings like say Public Bank, then estimating it's EPS will be more accurate and less surprise.
2014-08-27 11:07
I remember the mgt said they bought revenue insurance n therefore insurance co shall compensate the financial loss caused by fire. Wondering why the report never mention about insurance claim...? Maybe expert here can answer my doubt?
2014-08-27 22:26
Good write-up and very good discussion here..
I think one should look at a company's operating efficiency (especially ROIC) & risks when coming out the fair PE.
High efficient company (literally high ROIC)can generate higher FCF as compare to a low efficient company for the same amount of capital. FCF is the owner earning, not EPS. Hence, a high efficient company deserved high PE ratio than a low one.
A stable market leader generally has lower risk. I think it is quite risky in investing Supermx as you can see from the recent fire incident. Can you assure no fire incident will happen again in near term?
So, do you think Supermx with PE of 10 is fair, overvalued or undervalued? Don't forget PE ratio can be misleading if you compare a company have huge net debt to a net cash one.
2014-09-18 00:40
The flawed logic of PE -"To estimate value, we require an estimate of value" -Expectations Investing
2014-09-19 16:15
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How about this scenario:
Q2FY14=4.5cents. Annualized 18cents. PE at 10x(less efficient and second tier gloves mfger), thus fair value=rm1.80.
2014-08-23 07:49