Supermax seen to deliver stronger performance in 2HFY16

by **Cals** Tue 01 Mar 2016, 18:33

Supermax seen to deliver stronger performance in 2HFY16

By CIMB Investment Bank / The Edge Financial Daily | March 1, 2016 : 10:23 AM MYT

This article first appeared in The Edge Financial Daily, on March 1, 2016.

Supermax Corp Bhd
Feb 29 (RM2.87)
Maintain add with a higher target price (TP) of RM5.25: Supermax Corp Bhd’s revenue in the second quarter of financial year 2016 (2QFY16) fell 6.2% quarter-on-quarter (q-o-q), mainly due to average selling prices (ASPs) of various glove products falling by 5% to 15%. The decline in ASP was partially attributable to rising competition and lower raw material prices. Overall, Supermax’s core net profit rose marginally by 0.9% q-o-q in 2QFY16. It also declared a second interim dividend per share of two sen for the quarter, in line with our expectations.
Group revenue rose by 12.5% year-on-year (y-o-y) from RM534 million in the first half of FY15 (1HFY15) to RM601 million in 1HFY16, due to higher glove shipments, better operating efficiency from automation and favourable foreign exchange from the strengthening of the US dollar against the ringgit. As a result of higher operating leverage, Supermax’s core net profit rose 84.1% y-o-y from RM42 million in 1HFY15 to RM77 million in 1HFY16.
We expect Supermax to deliver stronger earnings performance in 2HFY16, driven by new capacity expansion at plants 10 and 11, which should increase capacity by 17% from December 2014 or 2.2 billion pieces per annum. Supermax is in the midst of installing another 10 new lines, due to be completed by June. It has already installed 20 new lines, of which, eight have started operations.
The stock trades at 12.7 times calendar year 2016 (CY16) price-earnings ratio (PER), below its three-year historical mean of 14 times and close to 30% below the sector mean of 18 times. We expect Supermax’s discount to its peers to narrow moving forward, given its positive earnings outlook, driven by capacity expansion in the rubber glove business and a new earnings driver from its contact lens business. In addition, we believe that the stock is a laggard relative to its domestic peers and see potential for its share price to catch up.
We maintain our “add” rating, with a higher TP of RM5.25, still based on 18.4 times CY17 PER (at a 20% discount to Hartalega Holdings Bhd’s target PER of 23 times). We see improving earnings prospects for Supermax, on the back of an estimated FY15 to FY18 earnings per share compound annual growth rate of 29%. Stronger earnings performance, better capacity delivery and higher contact lens contributions are potential rerating catalysts for the stock. — CIMB Investment Bank, Feb 28
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