Supermax Corp Bhd
(Sept 10, RM1.52)
Reiterate outperform with a higher target price (TP) of RM1.75: Supermax Corp Bhd recently announced a weak set of results for its fourth quarter of financial year 2019 (4QFY19). Its 4QFY19 profit after tax and minority interests (Patami) fell 57% to RM15 million due to a mismatch between material input cost and average selling price (ASP), whereby pre-profit margin was down to 4% compared to the normalised 12%. During the briefing, we gathered that a one-off cost, which we estimate to be around RM10 million, dragged down overall 4QFY19 bottom line. For illustrative purposes, if we add back RM10 million, normalised 4QFY19 Patami would be RM25 million (-28% quarter-on-quarter) bringing FY19 adjusted (FY19A) normalised core Patami to RM127 million (+18% year-on-year).
Due to the impact of the US-China trade war whereby effective Sept 1, Washington has imposed a 15% tariff on Chinese-made medical and vinyl gloves, Supermax expects to see an uptick in demand for its gloves, for which the positive impact is expected to be felt from the December-ending quarter period. Theoretically, the US tariff hike is expected to increase the price of Chinese-made gloves, which could compel a switch of US glove demand to Malaysia glove players whereby the US accounts for 30% of the group’s sales.
We expect a gradual margin expansion from the completed Plant 12 due to better efficiency from new lines. Upon its full commissioning in FY21, Supermax management guided an earnings before interest, tax, depreciation and amortisation margin of 20% compared to our conservative forecast of 16%. The capacity-enhancing plans are decommissioning old lines at the Sungai Buloh plant in Selangor from 12 to 20 lines (capacity to increase 97% to 2.4 billion pieces), and the new Plant 12 (4.4 billion pieces) behind the existing factory in Meru, Klang, Selangor. Upon full commercial production in stages from the second quarter of calendar year 2019 (2Q19) to end 4Q20, the group’s installed capacity will rise 30% to 27.4 billion pieces by end-2020. Beyond 2020, the expansions are new and replacement lines (five billion pieces; target completion end-2020 to end-2021), and building three plants with an estimated capacity of 13.2 billion pieces over 3Q21 to 1Q24. Total estimated capital expenditure is RM1.2 billion over the next five years. In the near term, for illustrative purposes, based on a net profit margin of 9%, ASP of US$22 (RM91.74) per 1,000 pieces, a utilisation rate of 75% and 4.4 billion pieces (upon full commissioning of Plant 12), this would generate a total net profit of RM27 million or 20% of our FY21 estimated (FY21E) net profit.
For illustrative purposes, in the absence of an interim dividend, it could be distributing treasury shares, currently at 54 million shares. This translates into 6.2 sen per share or a net yield of 4.1% at current market price.
We change our valuation base from FY20 estimate to calendar year 2020 estimate (CY20E). Correspondingly, our TP is raised from RM1.70 to RM1.75 based on an unchanged 17.5 times CY20E earnings per share of 10 sen (+1.0 standard deviation above five-year historical forward average). We like Supermax because: i) the stock is trading at an unjustifiable 40% discount to peers’ average compared to a historical discount of 30%; and ii) it is a prime beneficiary of a favourable US dollar/ringgit foreign exchange since the group does not hedge its sales receipts. Key risk to our call is longer-than-expected commercial operation of its new plants. — Kenanga Research, Sept 10