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Wednesday, January 20, 2016

CIMB Research upgrades Supermax to Add with RM5 target price

KUALA LUMPUR: CIMB Equities Research has upgraded glove maker Supermax to Add from Hold with a higher target price (TP) of RM5 from RM2.95 previously due to improving earnings prospects.

It said on Wednesday the higher TP was based on 18.4 times CY17 price-to-earnings (P/E), a 20% discount to Hartalega’s target P/E of 23 times (30% previously). This is based on the compounded annual growth rate (CAGR) of 21% for the FY15-18 EPS.

CIMB Research was among the 15 analysts and fund managers who attended Supermax’s investor briefing on Tuesday at its headquarters in Sungai Buloh, Selangor.

The briefing was followed by a tour to its contact lens division and visit to Plants 10 & 11 in Meru, Klang which have started since 2H15

“We are encouraged that Supermax has finally resolved the much delayed Plants 10 & 11 operations. It has started commissioning with eight lines since 2H15,” it said.

To recap, the deployment of Plants 10 & 11 has been delayed for more than two years due to the lack of water and electricity issues.

As at December 2015, the combined production capacity for both plants were about 2.2 billion pieces per annum or a 17% capacity increase from December 14.

CIMB Research said apart from that, management also shared on the development of its Glove City project in Bukit Kapar, Selangor.

This project will include four plants and is expected to sustain the group expansion plan until 2021. Each plant is expected to have an installed capacity of 7.9 billion gloves per annum.

Supermax is planning to start commissioning Plant 1 in 3Q17. Impressive growth potential from contact lenses

“We are impressed with the group’s development in the contact lens division. We learned that Supermax has already started producing dry lenses for OEM businesses, albeit at a smaller quantity of three million to four million per month. Management expects to see a healthy revenue contribution of about 10% from the division in FY18.

“We are turning optimistic on its growth prospects given that it has finally resolved the utilities issues and management is confident about stronger growth, driven by the Glove City project and new drivers in contact lenses.

“We raise our FY16-18 EPS by 15%-60% as we increase our utilisation rate assumption to over 78% from sub-60% previously as we are more confident with Supermax’s ability to deliver new capacity following the resumption of its Plant 10 & 11 operations,” it said.

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