Supermax Corp Bhd
(May 15, RM1.59)
Maintain buy with a lower target price (TP) of RM1.74 (previously RM1.79): Supermax Corp Bhd’s third quarter of financial year 2019 (3QFY19) earnings came in at RM34.6 million. This brings its cumulative nine months of FY19 (9MFY19) earnings to RM108.7 million (+11.8% year-on-year [y-o-y]) which lagged our but exceeded consensus expectations, accounting for 68% and 82% of our and consensus full-year FY19 earnings estimates respectively. The group’s earnings were supported by an increase in annual production capacity. However, overall earnings were partly dragged, particularly in 3QFY19, partly due to the upward revisions of the gas tariff and minimum wage from January 2019.
Its 9MFY19 earnings rose as a result of: i) increased output from Plant 10 and Plant 11 in Klang which were fully commenced in the second half of FY18 (added capacity of 5.6 billion pieces per annum [pa]); and ii) commissioning of replacement lines at the Kamunting Raya plant (capacity of 1.35 billion pieces pa). The higher sales volume mitigated the impact from: i) an increase in energy cost; ii) the minimum wage hike; and iii) a stronger ringgit during the quarter.
The first phase of its new 12th plant in Meru, Klang is on schedule for completion in 3Q of calendar year 2019 (CY19). This plant will be equipped with new high-speed and highly automated production lines. Coupled with the group’s ongoing project to replace existing lines at older plants, the expansion plan will boost Supermax’s production capacity by 7.6 billion pieces pa to 29.4 billion pieces pa by the end of CY20. No dividend was declared for the quarter to fund this expansion plan.
We have adjusted our earnings forecasts downwards for FY19 and FY20 to RM126 million and RM149.4 million respectively as we expect a slight compression in profit margin due to current subdued average selling prices.
We have revised our TP to RM1.74 per share (previously RM1.79). Our TP is derived by pegging our FY20 earnings per share forecast of 10.9 sen at a revised target price-earnings ratio (PER) of 16 times (previously 14 times), which is its five-year historical average PER.
Premised on the strong 9MFY19 financial performance, we expect earnings growth to continue to be sustained going forward. We are positive on the group’s effort to: i) rebuild and replace old production facilities aimed at extracting higher production output from existing locations; and ii) add new capacity by building new plants. At the end of CY20 and post-completion of all upgrading works and building of new plants, Supermax is expected to have an annual capacity of 29.4 billion pieces pa. This translates into an increase in Supermax’s production capacity by 35% (from its CY18 capacity of 21.8 billion pieces pa). Consequently, we believe that this will sustain the group’s earning trajectory going forward. All in, we maintain our “buy” recommendation on the stock. — MIDF Research, May 15