Friday 29 Mar 2024
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This article first appeared in The Edge Financial Daily on September 3, 2018

Supermax Corp Bhd
(Aug 30, RM3.36)
Maintain neutral with an adjusted target price (TP) of RM3.58:
Supermax Corp Bhd’s fourth quarter of financial year 2018 (4QFY18) earnings came in at RM9.8 million. This brought its full-year earnings to RM107 million, which was below expectations, accounting for only 82% of both our and consensus full FY18 earnings estimates. During the quarter, revenue and profit after tax and minority interest (Patmi) rose by 5.3% year-on-year (y-o-y) and 84.2% y-o-y respectively.

Supermax’s 4QFY18 revenue saw a y-o-y increase due to: i) higher average selling prices (ASPs); ii) higher output arising from revamp work on its older production lines; and iii) increased output from newly commissioned production lines from Plant 10 and Plant 11 in Klang. In addition, there is higher demand coming from countries such as those in Eastern Europe, which are currently in the midst of upgrading their healthcare quality as a result of an increase in healthcare awareness. Also, a reduction in the effective tax rate to 51% (from 73% in 4QFY17) caused the surge in Patmi.

We have maintained our earnings forecasts for FY19 as we expect the rebuilding and replacement of old production facilities as well as the commencement of two additional plants in FY19 to contribute to stronger earnings. Key risks to our earnings estimates include: i) a sudden surge in raw materials prices; ii) strong appreciation of the ringgit; and iii) production line breakdowns.

We have revised our TP to RM3.58 per share (from RM3.31 previously) as we rolled forward our valuation base year to FY20. Our TP was derived by pegging our FY20 earnings per share estimate of 25.6 sen at an unchanged price-earnings ratio (PER) of 14 times, which is its five-year average PER.

Despite the quarterly earnings coming in below our expectations, we opine stronger earnings going forward. This is premised on: i) rebuilding and replacement of old production facilities aimed at extracting higher production output from existing locations; and ii) adding new capacity via building two new plants. The new plants are expected to increase Supermax’s production capacity by 4.2 billion pieces per annum and targeted to be completed in the first half of calendar year 2019 (1HCY19) and 2HCY19. At the end of CY19 and post completion of all upgrading works and building of new plants, Supermax is expected to have an annual capacity of 27.2 bilion pieces per annum. However, we expect higher supply of gloves to have downward pressure on ASPs. This would lead to compression in profit margins moving forward. All in, we have maintained our “neutral” recommendation on the stock. — MIDF Research, Aug 30

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