This article first appeared in The Edge Financial Daily on February 14, 2019
Supermax Corp Bhd
(Feb 13, RM1.63)
Maintain buy with a target price (TP) of RM2.30: Supermax Corp Bhd continued to report a relatively good set of results, as 1HYF19 core-Patami of RM69.6m (+9.1%) tracked within consensus and our expectation, delivering around 52% and 54% of our respective forecast. The 21% quarter-on-quarter (q-o-q) profit growth is due to a contribution from the newly commissioned replacement lines from its Perak plant. We believe that Supermax is still currently on track to deliver a stronger set of earnings in line with our expectations. Growth in sales volume and the weaker ringgit was the main contributor to the 4.9% q-o-q growth in revenue for 2QFY19. We believe that earnings for 2HFY19 will remain robust, as Supermax will reap the full benefits of the newly refurbished lines. As the new lines are also more efficient, apart from revenue growth, we believe that the margin improvement is sustainable. The improvement in earnings before interest, taxes, depreciation, and amortisation margin (+1.9ppts q-o-q) based on the reported numbers are not substantial, negated by the advertising and promotion (A&P) cost related to its contact lens operation.
We believe that the contact lens business is yet to be profitable, and it will take Supermax at least two to three years before they are able to achieve break-even. The losses mainly arise from the spending of A&P, which is needed to break into new markets.
However, management has previously guided that they will not overspend on A&P to prevent the dilution of gains from the glove operation. Currently, they have allocated about RM15 million a year for A&P for the contact lens business.
We make no change to our earnings forecast, TP remains unchanged of RM2.30 with a “buy” rating. We believe that the continued improvement in results will help to gain investor confidence in management execution capability. Supermax continues to be our preferred “buy” pick for the sector and country. — Affin Hwang Capital Research, Feb 13