This article first appeared in The Edge Financial Daily on November 5, 2018

Supermax Corp Bhd
(Nov 2, RM3.38)
Maintain buy with a target price (TP) of RM4.60: Supermax Corp Bhd has reported a relatively good set of results as first quarter of financial year 2019 (1QFY19) core profit after tax and minority interests (Patmi) of RM31.5 million (+13 year-on-year) — within both consensus and our expectations — delivering around 24% and 23% of our respective forecasts. The strong headline Patmi of RM35.9 million (+28.8 year-on-year [y-o-y]) was mainly due to a one-off gain of RM6.5 million arising from an insurance claim. As we believe that Supermax Corp Bhd is on track to deliver based on our expectations, we have maintained our “buy” call and TP of RM4.60.

While the strong y-o-y growth earnings before interest, taxes, depreciation and amortisation growth of 10.2% was due to the commissioning of new capacity in the second quarter of FY18, we believe that Supermax would be still be able to achieve y-o-y growth of around 3% to 5% of 1.35 billion gloves from the rebuilt plant in Perak, which was only fully operational by end-September 2018. We believe that the new plant will not only generate revenue growth, but also some margin expansion as the new plant is more efficient than the previous one. The overall capacity target remains unchanged at 29 billion pieces in mid-2020 from the current 24 billion pieces.

Supermax shipped the first batch of contact lenses to Japan in August, and has also launched its brand Aveo locally in Malaysia. While management has not disclosed the financials for the contact lens division, we believe the segment is still operating at a loss due to the advertising and marketing expenses incurred to expand into new markets. We expect the new business division to only break even by FY22, but the losses are still manageable and would not significantly dilute profit growth of the glove business.

We believe the latest numbers reported by Supermax would serve to help to ease investor concern about management execution capability after the relatively weak 4QFY18 set of results. We have reiterated our “buy” call on the stock with a TP of RM4.60 based on 21 times calendar year 2019 estimated earnings per share. — Affin Hwang Capital, Nov 2