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Tuesday, February 16, 2016

Supermax’s new plants to provide boost to earnings growth

This article first appeared in The Edge Financial Daily, on February 16, 2016.

Supermax Corp Bhd
(Feb 15, RM2.86)

Upgrade to buy with a revised target price (TP) of RM3.40: The two long-delayed new rubber glove plants, Plants 10 and 11 in Klang, have finally been commissioned. We understand that eight double former lines are currently in operation with an installed capacity of approximately 2.2 billion pieces per annum catering for nitrile gloves.

The remaining 12 lines, which have an additional capacity of 3.3 billion pieces per annum, are slated for full commissioning by the first half of calendar year 2016 (1HCY16). The development is positive as Supermax has been a laggard for most of 2014/15, as the poor execution of its expansion plans has put a dampener on investor sentiment. Supermax had been trading at depressed valuations and a steep discount to the sector average throughout 2015 due to the many delays and uncertainties.

We believe that the commissioning of Plants 10 and 11 will provide a positive boost to earnings growth and its stock performance.

Supermax has declined by 14% year to date, as sentiment turned against glove stocks. We think that the correction was overdone, and value has emerged at this juncture.

Supermax is trading at 13 times price-earnings ratio (PER) financial year 2016 (FY16), at a significant discount to the sector average of 20 times. Given the better earnings visibility, the huge discount should be unwarranted, and we believe there is room for it to narrow.

We raise our earnings forecasts by 10.9% for FY16 and 9.5% for FY17 (1.4% for CY15). This is premised on the higher installed capacity from Plants 10 and 11, a higher US dollar assumption of RM3.95 versus RM3.50 earlier, and better operational efficiencies from newer lines. We also raise our TP to RM3.40 at 16 times PER FY16 (from 12 times), and a 10% discount to the long-term FBM KLCI average of 18 times. Upgrade to a “buy” on valuations. — AffinHwang Capital, Feb 15

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