This article first appeared in The Edge Financial Daily, on November 16, 2015.

Supermax Corp Bhd
(Nov 13, RM2.45 )
Maintain market perform with a higher target price (TP) of RM2.60: In an announcement to Bursa Malaysia, Supermax Corp Bhd’s wholly-owned Supermax Healthcare Ltd has been awarded one of the licences to supply medical gloves to the National Health Service (NHS) over the next four years, and contribution is expected to start from financial year ending June 30, 2017 (FY17).

The NHS covers all hospitals in the United Kingdom, consuming approximately £50 million (RM335 million) of medical gloves annually. With this licence, Supermax will be in a position to capture a share of the lucrative NHS business.

This news came as a pleasant surprise to us as well as the market. For illustrative purposes, assuming a net margin of 11%, the 30% market share of the RM330 million medical gloves consumed annually will contribute RM11 million or 9% to our FY17 net profit forecast.

Growth going forward is expected to be driven by two new plants and we understand that the  building structures for Plant #10 and Plant #11 — Lot 6059 and Lot 6058 in Meru, Klang — are up and the first batch of lines has been commissioned. Lot 6059 and Lot 6058 will have 24 and 16 production lines producing 3.2 billion and 2.2 billion pieces of nitrile gloves per annum (pa), respectively, bringing the total nitrile production capacity from 6.9  billion (including the 1.4 billion in Lot 6070) to 12.3 billion pieces pa or 52% of the total installed capacity. Both plants are targeted to be fully commissioned by the first quarter of 2016.

We are upgrading our FY17 net profit by 9%, assuming a 30% portion of the contract and a net margin of 11%.

Correspondingly, we upgrade our TP from RM2.38 to RM2.60 based on FY17E (estimate) earnings per share. We roll forward our valuation from FY16E to FY17E. The share price has appreciated 46% year to date. Coupled with constantly missing earnings expectations as well as a slower-than-expected ramp-up at the new plant, we expect its earnings to be pedestrian in subsequent quarters. As such we maintain our “market perform” rating. — Kenanga Investment Research, Nov 13