CIMB Research upgrades Supermax to Add

Supermax to benefit from weak Ringgit

KUALA LUMPUR: CIMB Equities Research has upgraded Supermax Corporation to an Add as it turns optimistic about the glove maker’s prospects due to the favourable environment from the weak ringgit.

It had on Wednesday raised the target price to RM2.50 as it rolled over to CY18. However, it is still pegging Supermax to a conservative 12 times price-to-earnings (P/E), in line with its five-year historical mean. 

“This is also a 48% discount to the glove sector’s current P/E, which is unjustified in our view. Key downside risk to earnings are the sharp strengthening of the ringgit and spike in raw material prices,” it said.

To recap, Supermax had a slow start to FY17. Both 1QFY17 revenue and net profit fell 13.2% on-year and 49.2% on-year to RM269mil and RM19.5mil. 

Hence, earnings before interest (EBIT) margins also declined by 5.9 percentage points to 9.5%. 

“We had anticipated a weaker 1QFY17 earlier given the less conducive environment as well as gradual ramp-up of the remaining capacity in the following quarters. Hence, we still deem the set of results within expectations at 16% of our and 14% of consensus estimates,” it said.

CIMB Research suspected that the weaker 1Q results were due to a convergence of factors. Firstly, the group’s average selling prices (ASPs) were likely hit by intense pricing competition. This is also likely to lead to difficulties in passing on operating cost increases such as gas (6% on-quarter) and minimum wage (11% on-quarter). 

On the other hand, the group also incurred additional expenses from commercial activities of its contact lenses segment while there was a high base effect in 1QFY16 from a weaker ringgit and lower raw material prices.

“We believe that the group is looking to commission the remaining six lines from Plant 10 and 11. To recap, the water supply was insufficient to run the remaining six lines out of a total of 20 lines in Plant 10 and 11.

“We think that the group has likely commissioned an estimated one to three lines in 1QFY17 and is still working with authorities to secure sufficient water supply to run the remaining lines. This will increase the group’s output by another 300 million to 900 million pieces per annum, bringing total production capacity to 22.6 billion to 23.2 billion pieces per annum.

“As an export-orientated counter, Supermax is set to benefit from arbitrage opportunities, stemming from the recent appreciation of US$/RM rates. Note that US$/RM rates have appreciated by 8.5% since beginning 2QFY17. Hence, we opine that earnings in the short term will be boosted by currency gains. 

“This should also aid in mitigating the impact of rising overall costs such as raw material prices, etc. Hence, we expect the group’s profitability to improve moving forward,” said CIMB Research.