Supermax’s land buy seen to improve  earnings visibility

This article first appeared in The Edge Financial Daily, on March 17, 2020.
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Supermax Corp Bhd
(March 16, RM1.53)
Maintain outperform with an unchanged target price (TP) of RM2:
In an announcement to Bursa Malaysia, Supermax Corp Bhd’s wholly-owned Maxter Glove Manufacturing Sdn Bhd is buying a piece of industrial land for RM20 million measuring 4.1 acres (179,000 sq ft/1.66ha). The acquisition works out to RM111/sq ft which is 20% more expensive than the previous adjacent acquisition at RM92/sq ft  purchased back in July 2019. With the latest acquisition, the enlarged  land tract and subsequently expanded facility within the vicinity of its Klang Maxter Glove plant should yield operational synergies and greater scale economies. Based on our estimates, the size of this piece of land can house one plant with an estimated capacity of 4.7 billion pieces per annum. For illustrative purposes, the impact to financials are: i) the RM20 million land acquisition and estimated capital expenditure of RM60-100 million for plant and machinery will not have any material impact on Supermax’s net debt and net gearing of RM266 million and 0.2 times, respectively, as at Dec 31, 2019 further reinforced with an operating cash flow averaging RM193 million per annum over the next two years; and ii) assuming 8% net profit margin, average selling price of RM95 per 1,000 pieces and utilisation rate of 80%, this new capacity could generate a total net profit of RM29 million or 20% of our financial year 2021 (FY21) forecast. 

We are positive on Supermax’s growth prospects going forward, underpinned by demand uptick with nascent signs of a strong volume growth rebound. With the past lacklustre demand far behind us, we see ramped-up restocking activities as the current outbreak of the Covid-19 reinforces higher hygiene standards, spurring the strong sequential second quarter (2Q) of FY20 earnings momentum into FY21. 

Plant 12 consists of 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, block A (five lines have already started commercial production), the remaining three lines are expected to be ready by 1Q20. For Block B, all eight lines are expected to be fully commissioned by the second half of 2020. Upon full commercial production in stages from 2Q19 to end-4Q20, installed capacity will rise 13.4% to 26.2 billion pieces per annum. Recall it had completed the acquisition of a piece of land in Meru, Klang on which it plans to build three plants namely Plant 13, 14 and 15 which will contribute another 13.2 billion pieces of gloves to its total installed capacity over the next five years. 

We reiterate “outperform”. Our TP is RM2 based 20 times 2020 earnings per share of 10.0 sen (at +1.5 standard deviation above five-year historical forward mean). We like Supermax because: i) the stock is trading at an unjustified 40% discount to peers’ average compared to a historical discount of 30%; and ii) it is a prime beneficiary of favourable US dollar/ringgit foriegn exchange trend since they do not hedge their sales receipts. 

Key risk to our call is longer-than-expected commercial operations of new plants. — Kenanga Research, March 16