This article first appeared in The Edge Financial Daily on July 2, 2018
Supermax Corp Bhd
(June 29, RM4.17)
Maintain add with a higher target price (TP) of RM4.53: To recap, Supermax Corp Bhd is undertaking a rebuilding and replacement programme involving two existing plants (Block G in Kamunting, Perak and Lot 38, Sungai Buloh). We gather that commercial production from Block G (1.4 billion per annum capacity) is set to kick in gradually from end-first quarter for financial year ending Sept 30, 2019 (1QFY19). For Lot 38 (2.4 billion per annum capacity), revamp work will only begin upon securing enough capacity from other plants including Block G to offset potential production loss. We estimate that works on Lot 38 will only begin in first half of calendar year 2019 forecast (1HCY19F).
Also, Supermax plans to build two new plants with a total capacity of 4.2 billion pieces per annum. To ensure sufficient water and electricity to support plant operations, both will be built in areas where it has existing manufacturing presence. Construction work has started on one plant (Lot 6061, 2.2 billion per annum capacity) in close proximity to its existing plants in Meru, Klang. The other plant (Block F, 2 billion per annum) will be in Kamunting where an old unused warehouse currently sits; construction work will begin upon completion of Block G.
Supermax recently announced that its 70%-owned Japanese unit Aime Supermax KK has secured product licence for its contact lenses from the Pharmaceutical and Medical Device Authority of Japan. This will allow Supermax to export its contact lens products to Japan, which is the second-largest user of contact lens globally after USA. We are positive on this development, but do not expect material contribution near term. In our view, this segment will only be profitable in 1-2 years, as the group will need to allocate all gross profit (GP) gains to grow its brands more aggressively.
We expect Supermax to record sequentially stronger quarters ahead, to be driven by: i) aggressive capacity expansion, ii) higher margins from increased efficiencies, and iii) stronger US$/ringgit. We are also not overly concerned about the recent increase in nitrile butadiene (NBR) prices as the group has a fairly balanced product mix at 52 NBR: 48 natural latex (NR). Along with higher selling prices, impact from the recent decline in latex prices should be more than offset higher NBR prices.
We tweak our estimates for bookkeeping purposes and lift our target price to RM4.53, now based on 18.4 times calendar year 2019 forecast price earnings (P/E) (+1 standard deviation (sd) of its three years mean) vs 15.2 times previously. Our target P/E is ~30% discount to the glove sector’s current weighted average 26.5 times calendar year 2019 P/E. In our view, Supermax should trade at higher P/E from current levels (16.3 times CY19 forecast) given its better earnings visibility and resolution of water supply issues previously faced by its Plants 10 and 11. A potential rerating catalyst is faster-than-expected delivery of its capacity expansion plans. Downside risks: delays in its expansion and loss of key management. — CGSCIMB Research, June 28