KUALA LUMPUR (Dec 22): Analysts are mixed over Supermax Bhd’s venture into the US to manufacture Made-in-USA medical gloves and other personal protective equipment (PPE).
Kenanga Research was concerned about Supermax Corp Bhd’s overseas execution risk, thereby reducing its target price (TP) for the stock to RM9.05 from RM12. It reiterated its "outperform" call for the stock.
Supermax announced yesterday that it is venturing into the US to manufacture Made-in-USA medical gloves and other PPE, as well as building a national headquarters there with an initial capital outlay of US$100 million (RM405 million).
“The initial paid capital is part of the total allocation of US$550 million capital investment for Medical Glove Plant #18 when both Phases #1 & #2 are completed and commissioned for which details are scant at the moment with regard to production capacity.
“The funding is expected to be financed through a combination of internally generated funds and bank borrowings, the ratio of which will be decided at a later date. We understand that financing is expected to come from profit generated from distribution centres. The group had a net cash of RM2 billion as at Sept 30, 2020,” Kenanga Research noted.
Meanwhile, RHB Research Institute believes Supermax’s venture to the US is a “step in the right direction”.
“We are positive on the progress of this plan as this will enhance its branding in the US over the long term. In the US, Supermax sells its gloves under its own brand Aurelia. Pending details of the capacity, we maintain our earnings estimates. While cost of production may be higher than in Malaysia, we expect the higher ASP (average selling price) of Made-In-USA gloves to cover the increase in cost,” it said.
“In the short term, 2QFY21 earnings (for the second quarter ending Dec 31, 2020) should benefit from the worsening nitrile glove shortage due to the temporary closure of some glove manufacturing plants,” it added.
For the stock, RHB Research Institute has a "buy" call with a TP of RM13.25.
It added that Supermax had conducted Covid-19 tests on all of its workers and all were negative, so its operations were not affected.
Meanwhile, Kenanga Research pointed out that it does not expect supply to flood the market at least in the first three quarters of 2021 despite growing concerns among investors that a number of Malaysian listed companies had announced new ventures into the glove manufacturing segment.
“Supermax is expected to gain from higher margins from both its glove manufacturing and OBM (own brand manufacturing) distribution due to abnormal demand and acute supply tightness. On new capacity, its Plant 12 comprises Block A and Block B, each consisting of eight double former lines with 2.2 billion pieces each (total 4.4 billion pieces). As of now, for Block A, three new lines started commissioning in end-March 2020 on top of the five lines already in commercial production. For Block B, as all eight lines were scheduled to be fully commissioned by 2H20 (the second half of 2020), we expect the installed capacity (for full commercial production) to have risen by 13.4% to 26.2 billion pieces per annum by now,” it added.
Kenanga Research noted that it continued to like Supermax because the stock was trading at an undemanding eight times earnings per share (EPS) estimated for the financial year ending June 30, 2021 (FY21E) compared to expected explosive earnings growth of over 100%, and its OBM model enables it to extract higher margins from distributor prices compared to the OEM model at lower factory prices.
Supermax's share price settled at RM6.89 yesterday, giving the stock a market capitalisation of RM18.75 billion.