Supermax to benefit from weak Ringgit
KUALA LUMPUR: CIMB Equities Research has upgraded glove maker Supermax Corporation to an Add from Hold, with a higher target price (TP) of RM3.47. Its last traded price was RM2.85.
It said on Thursday its higher TP was based on 15.2 times CY19 price-to-earnings (P/E), in line with its five-year historical average price-to-earnings (P/E).
“This is also a 47.2% discount to the glove sector’s CY19 P/E of 24.7 times. Note that the discount is mainly to reflect any potential regulatory risks and weaker earnings delivery track record in the past,” it said.
Supermax’s 1HFY6/18 revenue rose by 28.1% year-on-year, driven by higher sales volume.
CIMB Research understands that the higher sales volume was owing to increased contributions from Plants 10 and 11 as all water issues has been fully resolved.
Note that all 12 lines in Plant 10 and 11 have been fully operational since 2QFY18.
The 1HFY18 EBIT margins improved 5.5% pts year-on-year to 15.8% which it attributed to higher economies of scale.
Accordingly, 1HFY18 net profit rose to RM63.8m (+51.5% year-on-year) despite a higher tax rate (11.9% pts year-on-year).
Capacity delivery to drive earnings growth Supermax expects its glove production capacity to grow by 16.1% to 27.2bil per annum by end-2019.
The new capacity is mainly from plans to build two new plants (total capacity of 4.2bn pieces p.a.) and its ongoing rebuilding and replacement programme in which Supermax plans to undertake a complete revamp of the two existing plants (+1.5 billion pieces per annum).
Note that the first plant undergoing revamp (Block G, Kamunting) is scheduled to begin gradual contribution beginning 3QCY18 (1QFY19).
Total capex allocated for the four projects is RM333mil.
For its contact lens segment, Supermax has expanded its annual production to 70m in 2017 (75%). This is due to strong demand from original equipment manufacturers (OEM) in Europe.
Also, Supermax plans to promote its own brand products (Aveo) globally, especially in key markets such as China and Japan. Currently, it is exporting to more than 10 countries.
Nevertheless, Supermax expects this segment to turn profitable in two to three years’ time as all current gains at the gross profit level will be allocated for advertising and promotion spending to grow its brand.
“Given the improved outlook, mainly for its glove division, we are turning more optimistic on the stock. As a result, we lift our FY18-20F EPS by 12.2%-17.1% to account for: i) higher glove sales, ii) improved cost efficiencies, and iii) lower tax rates.
"In our view, the worst is over for Supermax, as it has finally resolved its utilities issues that had previously hindered the full commencement of operations at Plants 10 and 11,” said CIMB Research.
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