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This article first appeared in The Edge Financial Daily on April 18, 2018

KUALA LUMPUR: Former Supermax Corp Bhd group managing director Datuk Seri Stanley Thai’s apology to the prime minister at the weekend sparked a flurry of commentaries over his action. Supermax chairman Tan Sri Rafidah Aziz’s resignation two days later generated more political noise.

However, analysts think investors would do well to cut out the political noise and focus on the rubber glove maker’s earnings in the coming months.

They pointed to the group’s quarterly earnings growing year-on-year (y-o-y). Its net profit was up 42.8% y-o-y and 51.5% y-o-y for the first financial quarter ended Sept 30, 2017 (1QFY18) and 2QFY18 respectively, driven by higher production capacity and improved operational efficiency.

Shares in Supermax closed higher for a second day in a row yesterday after Thai’s apology. The stock rose as high as 1.9% to an intraday high of RM2.73 in early trade before closing at RM2.69, up one sen or 0.37% from Monday’s closing. Over the past 12 months, the counter has gained 42.6%.

At the current share price, Supermax’s market capitalisation stands at RM1.76 billion, still the lowest among the three listed major glove makers — Hartalega Holdings Bhd, Top Glove Corp Bhd and Kossan Rubber Industries Bhd — on Bursa Malaysia.

Hartalega, with the highest market cap of RM21.42 billion, closed 11 sen or 1.67% lower at RM6.47 yesterday. Top Glove’s share price settled unchanged at RM10.16, valuing it at RM12.97 billion. Kossan shares, meanwhile, fell 21 sen or 2.73% to RM7.47, with a market value of RM4.78 billion.

At yesterday’s closing price of RM2.69, Supermax’s stock traded at a price-earnings (PE) multiple of 15.55 times 2018 earnings forecasts, lower than its three peers. Hartalega was trading at 49.39 times 2018 estimate, Top Glove 28.95 times and Kossan 20.81 times.

An analyst, declining to be named, said Supermax’s stock was previously a laggard compared with its peers, but now it has caught up.

“Previously, Supermax was a laggard play, so there was a lot of valuation catch-up to do. But now, its valuation has gone up, against the sector average [of about 22 times].

“The [glove] sector is still showing strong earnings growth and Supermax’s valuation is still trading healthily at about 19 times, although it is still behind its peers,” she told The Edge Financial Daily via telephone.

She added that the stock discount gap had also narrowed, given its strong y-o-y earnings growth momentum in the first half of FY18.

“[Supermax’s] valuation has caught up. Over the last few months, all glove counters’ stocks have rallied due to better earnings. Supermax is now playing catch-up.”

At the same time, she believes Supermax has the capability to generate better earnings y-o-y.

“On a fundamental basis, the company itself can generate better or stronger earnings y-o-y. From there, we can see the share price continuing to rally.

“It (upside to Supermax) has to be the fundamental reason; you can’t say anything else. If earnings or margins show signs of pressure because of a stronger ringgit and higher raw material cost, then it would be some downside risk,” she added.

TA Securities analyst Tan Kam Meng deems Supermax’s valuation as “fair”, giving it a higher PE multiple of 13 times against calendar year 2018 earnings per share from 11 times previously.

“The upgrade in PE multiple is to reflect better earnings, efficiency and utilisation rates,” he said.

However, Tan noted that Supermax’s capacity expansion at its glove division remains cloudy.

Recall that the group has two major capacity expansions in the pipeline — the Glove City in Klang (31.7 billion gloves per year) and the Supermax Business Park in Serendah (15.5 billion gloves per year), both located in Selangor.

“When combined, these projects are expected to more than double the group’s current capacity, which we estimate at about 21 billion gloves per year.

“Fundamentally, it is about its (Supermax) earnings growth, although the expansion [is] still cloudy for its glove and contact lens divisions,” said Tan.

Bloomberg data show four of eight analysts covering Supermax have a “buy” call on the stock, while the remaining three recommend a “hold” rating and one with an “underperformed” recommendation.

The average target price is at RM2.51, indicating a downside potential of 6.7%.

Nevertheless, the analysts are maintaining their outlook for the glove makers’ earnings growth going forward.

“Our top picks are Hartalega and Top Glove. Glove makers should continue seeing resilient demand and their earnings should continue to sustain,” said Tan.

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