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Saturday, April 28, 2018

Supermax surges as analysts turn upbeat

CORPORATE NEWS
Saturday, 28 Apr 2018
by ganeshwaran kana

Investment option: Supermax’s undervaluation gives more buying opportunities for investors seeking to benefit from the rubber glove industry’s performance.

GLOVE maker Supermax Corp Bhd  may have gotten its “mojo” back.

After nearly two years in downtrend, halving in value, the stock has charged by almost 44% in the last four months. This was despite the volatility and uncertainties in the local bourse year-to-date.

The open apology made by Supermax’s controlling shareholder and former managing director Datuk Seri Stanley Thai to the caretaker premier Datuk Seri Najib Tun Razak has provided a further boost to the stock.

Thai, who is appealing against an insider trading conviction, has apologised to Najib on April 14 for his pro-opposition stance during the 13th general election.

The apology aside, there are more factors behind Supermax’s surge in the past few months.

Analysts are largely upbeat on the prospects of the glove maker, which is actively pursuing production capacity expansion.

A quick check on Bloomberg shows that six research houses recommend “buy” ratings on Supermax, while two others have “hold” calls. Kenanga Research, on the other hand, issued a “sell” call.

What are the catalysts that have revitalised Supermax, once the darling of investors chasing rubber glove stocks?

The group, which has a market capitalisation of nearly RM1.88bil, currently trades at an undemanding valuation as compared to its industry competitors.

Supermax is valued at a 12-month trailing price-to-earnings (PE) ratio of 20.80 times, significantly lower than other glove-based counters.

In comparison, Hartalega Holdings Bhd   Top Glove Corp Bhd 
and Kossan Rubber Industries Bhd  have PEs of 45.55, 30.23 and 22.46 times, respectively.

The stock’s undervaluation gives more buying opportunities for investors seeking to benefit from the rubber glove industry’s performance.

In an earlier note, RHB Research indicates that the the stock is trading at a steep discount to the sector’s average PE.

“We believe the discount gap should narrow, given Supermax’s strong year-on-year (y-o-y) earnings growth momentum, going forward, and as investors’ concerns of leadership at the company have been addressed,” says the research firm.

Valuations aside, analysts say Supermax’s prospects look promising on the back of its two-pronged growth strategy.

The glove maker is currently rebuilding and refurbishing its two production facilities in Taiping and Sungai Buloh.

Apart from that, Supermax plans to add new capacity by building another two gloves production plants in Klang and Taiping.

Post-completion all refurbishment works and construction of new plants, expected by end-2019, Supermax will have an annual capacity of 27.2 billion pieces, marking an increase of 16.1%.

The capacity expansion, which is aimed at driving earnings growth, will see total capital expenditure of about RM333mil.

MIDF Research, which maintains its “buy” call on Supermax, opines that the continued strong global demand for rubber gloves will bode well for the company.

“We are revising our earnings forecasts for the financial year 2019 (FY19) up by 14.1% as we are expecting higher revenue to come in due to the commissioning of newly replaced production lines in its Sg Buloh and Taiping plants as well as new production lines from the plants in Taiping and Klang,” it says.

Similarly, CIMB Research has revised its earnings forecast on Supermax, given the improved outlook, mainly for its glove division.

“We lift our FY18-FY20 earnings per share forecast by 12.2% to 17.1% to account for higher glove sales, improved cost efficiencies and 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,” the research house says.

Meanwhile, despite its positive stance on Supermax’s expansion plans, Kenanga Research remains cautious on the group’s production schedule punctuality, given past protracted delays.

On another note, the rising crude oil price is also expected to positively benefit Supermax, although a bane for the larger rubber gloves sector.

An increase in crude oil prices may lead to higher prices of nitrile butadiene, which is made from a byproduct of crude oil.

CIMB Research says in a separate report that while any impact would likely be minor as nitrile butadiene prices are driven mainly by supply-demand dynamics, a persistently high oil price would have a negative impact on the rubber glove sector.

“If oil prices stay persistently high, we are of the view that nitrile-skewed glove players such as Hartalega and Kossan would like be negatively affected.

“However, glove makers with a large product mix in natural rubber, such as Top Glove and Supermax, should benefit from cost advantages,” it says.

Aside from its glove-making operations, Supermax’s another pillar is its contact lens business.

Established in 2014, the company currently has four contact lens production lines with total capacity of 70 million pieces yearly.

At present, Supermax exports its contact lenses to 65 countries and expects to enter the Japanese market by June FY19.

The contact lens venture is currently cashflow positive, but loss-making.

RHB Research says the business is a long-term catalyst for Supermax and will likely turn profitable in two to three years.


Read more at https://www.thestar.com.my/business/business-news/2018/04/28/supermax-surges-as-analysts-turn-upbeat/#SHGC8Qx4QRlfCLoX.99

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