1QFY21 core net profit of RM790m (+98% QOQ; +3000% YoY) came in above expectations at 49%/41% of our/consensus full-year forecasts. The positive variance compared to our forecast was due to higher-than-expected ASP and margin. While we raised FY21E/FY22E net profit by 94%/9% to account for higher ASP assumptions, our target price is lowered slightly from RM12.75 to RM12.00 as we lowered our target PER rating to 0.5SD above 5-year mean to reflect a moderation in earnings growth towards more sustainable levels beyond FY21. Reiterate Outperform.

Key results’ highlights. QoQ, 1QFY21 revenue rose 46%, largely due to higher ASPs and volume sales from full quarter contribution in Plant 12. 1QFY21 PBT rose 100% as PBT margin rose 21.7ppt to 77.6% from 55.9% in 4QFY20, largely due to higher ASP, better economies of scale on improved efficiencies from the new plant, and higher margins from its Own Brand Manufacturing (OBM) in both Manufacturing & Distribution divisions. This brings 1QFY21 core net profit to RM790m (+98% QoQ). No dividend was proposed for 1QFY21 as expected.

YoY, 1QFY21 core net profit rose 3,000% to RM790m due to revenue growth (+265%) and was further boosted by higher ASP.

Key highlight is ASP anticipated to continue rising. We highlight that industry ASP has risen for Sept to Dec delivery suggesting that the robust demand will continue over the next few quarters. We do not expect supply to flood the market at least in the first three quarters of 2021 despite growing concern amongst investors that a number of Malaysian listed companies have announced new ventures into the gloves manufacturing segment. We expect demand will stay strong at least over the next two years and shortage in supply will remain tight due to formers shortage and raw material constraint. In an unprecedented move, Supermax is allocating USD550m capex in 2 phases of which details are scant at the moment with regards to production capacity. The group is looking to set up a manufacturing plant in the United States namely Plant 18 and currently in talks with various government agencies in the US looking for a suitable estimated 50 acre site initially. Financing is expected to come from profits generated from distribution centres. Separately, in an announcement to Bursa Malaysia, Supermax has proposed for a dual listing on the Singapore Exchange (SGX).

We upgrade FY21E/FY22E net profit by 94%/9% after raising ASP/1,000 pieces from USD44/USD43 to USD65/USD45 in FY21E/FY22E, and raising EBITDA margin from 48%/48% to 62%/50%.

Undemanding PER valuation. However, we reduce our TP from RM12.75 to RM12.00 based on 13x CY21E EPS (vs 20.8x previously) (at 0.5SD above 5-year historical forward mean). We lowered our PER rating as we believe valuations are already pegged to super-normal earnings; hence, moderation in earnings momentum beyond this phase should have

been factored in. We like Supermax because: (i) the stock is trading at an undemanding 8x FY21E EPS compared to expected explosive earnings growth of >100%, and (ii) its OBM model enables it to extract higher margin from distributor prices, compared to the OEM model at lower factory prices. Reiterate Outperform.

Key risk to our call is longer-than-expected commercial operations of new plants.

Source: Kenanga Research - 28 Oct 2020