Supermax Corp Bhd
(May 26, RM1.96)
Maintain “hold” with a lower target price of RM2 from RM2.07. Supermax reported a quarterly net profit of RM24.9 million for the quarter ended March 31, 2015. Note that the group announced on May 13, 2015 that it had changed its financial year-end from December to June. As such its financial year 2016 (FY16) will be an 18-month financial period ending June 30, 2016.

The quarterly net profit was 6.2% lower than a year earlier, while revenue dropped 3.9% year-on-year (y-o-y). Meanwhile, the quarterly earnings climbed 24.3% quarter-on-quarter (q-o-q) despite revenue shedding 13.7% q-o-q. Supermax’s quarterly net profit was below our and consensus’ expectations by meeting only 17% and 20% of our and consensus’ full-year estimates, respectively.

We believe the negative deviation is attributed to the high start-up costs incurred for its new plants in Klang and a margin squeeze in the industry.

The group’s revenue fell 3.9% y-o-y, as the group priced its gloves cheaper amid falling costs of raw materials such as natural latex and nitrile latex.

Meanwhile, net profit dipped 6.2% y-o-y which we believe was partly dragged down by the start-up costs incurred for its new plants in Klang.

Besides, we reckon that the price competition in the industry resulted in a margin squeeze which led the group to keep its selling prices attractive to support its sales volume growth.

As a result, the operating profit margin shrank 2.1 percentage points in 1QFY15 to 12% from 14.2% a year ago. Tax rate normalised in first quarter calendar year 2015 (1QCY15).

On a quarterly basis, revenue in 1QCY15 dipped 13.7%, thanks to lower average selling prices of gloves. Correspondingly, profit before tax in 1QCY15 fell 13.2% q-o-q.

We believe that the appreciation of the US dollar had not contributed much to the group as selling prices of gloves were kept subdued amid a competitive environment.

Nevertheless, net profit of the group increased 24.3% q-o-q as the tax rate normalised to 12% in 1QCY15.

To recap, the group incurred a high tax rate of 38% in 4QCY14 as the group took into account the final year- end adjustments on its tax and deferred tax provisioning.

We slash our earnings forecast for CY15 by 20% to account for the lower-than-expected selling prices of gloves and narrower margin of the group.

Following the change in financial year-end from December to June, we have fine-tuned our earnings forecast for FY16, accordingly. We also instate our earnings forecast for FY17. — JF Apex Securities, May 26

This article first appeared in The Edge Financial Daily, on May 27, 2015.