Supermax seen to be preparing to up manufacturing capacity with land buy

This article first appeared in The Edge Financial Daily, on July 22, 2019.
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Supermax Corp Bhd
(July 19, RM1.64)
Maintain buy with an unchanged target price (TP) of RM1.88:
Our TP implies financial year ending 2020 forecasts (FY20F) forward price-earnings of 17.2 times, +0.4 standard deviation from the mean. Supermax Corp Bhd has acquired 706,000 sq ft of land in Klang for RM65 million cash, where it plans to build three nitrile glove manufacturing plants. We are positive on the deal as demand growth for gloves remains good at 8-10% annually. The land’s location is also strategically located near Supermax’s current manufacturing plants.

Supermax announced to Bursa Malaysia that it has acquired a freehold land with industrial premises at Kapar, Klang for RM65 million cash. Land size is 65,550 sqm (or 706,000 sq ft). The seller is Leader Cable Industry, a wholly-owned subsidiary of Sarawak Cable. We gather that the premise has already obtained a certificate of fitness and other local authorities’ licences. The premise is also connected to water and electricity supplies.

The company plans to expand its manufacturing capacity on the new land over the next five years, at the cost of around RM550 million. This would boost Supermax’s installed capacity to 13.2 billion pieces per annum (ppa) or 45% higher from its current base to 42.6 billion ppa in the future.

In line with our long-term positive view on demand in the gloves sector, which has been growing steadily at 8% to 10% pa in the past, we are positive on the land acquisition.

The earnings impact is limited in the near term as we believe it would take more than two years before the first plant is ready for production.

Supermax’s net gearing is expected to increase to 30% (from the current 24%) but this is still manageable at below 50%.

We like Supermax due to its exposure to the glove sector, which is expected to see stable demand growth of 8-10% annually. — RHB Research Institute, July 19