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Monday, March 16, 2020

Supermax Corporation - Buying Land with Improving Visibility

In an announcement to Bursa Malaysia, SUPERMX disclosed that it is buying a piece of land for RM20m which is located within the vicinity of its Klang Maxter Glove plant as well as the piece of land purchased back in July 2019 which should yield operational synergies. We are positive on SUPERMX’s improving earnings visibility due to the scrupulous execution of its expansion plans. More importantly, recent land acquisitions underlined SUPERMX’s commitment towards future growth. TP is RM2.00 based 20x CY20 EPS of 10.0 sen. Reiterate OP.

Buying land for RM20m. In an announcement to Bursa Malaysia, SUPERMX’s wholly-owned Maxter Glove Manufacturing Sdn Bhd is buying a piece of industrial land for RM20m measuring 4.1 acres (179k sq feet). The acquisition works out to RM111/sq feet which is 20% more expensive than the previous adjacent acquisition at RM92/sq feet purchased back in July 2019. With the latest acquisition, the enlarge land tract and subsequent expanded facility within the vicinity of its Klang Maxter Glove plant should yield operational synergies and greater scale economies. Based on our estimates, the size of this piece of land can house one plant with an estimated capacity of 4.7b pieces per annum. For illustrative purposes, the impact to financials are; (i) the RM20m land acquisition and estimated capex of RM60-100m for plant and machinery will not have any material impact on SUPERMX’s net debt and net gearing of RM266m and 0.2x, respectively, as at 31 Dec 2019 further reinforced with an operating cashflow averaging RM193m per annum over the next two years, and (ii) assuming 8% net profit margin, ASP of RM95/1000 pieces and utilisation rate of 80%, this new capacity could generate a total net profit of RM29m or 20% of our FY21 forecast.

Earnings expected to trend higher in subsequent quarters. We are positive on Supermax’s growth prospect going forward, underpinned by demand uptick with nascent signs of a strong volume growth rebound. With the past lacklustre demand far behind us, we see ramped-up restocking activities as the current outbreak of the Wuhan virus reinforces higher hygiene standards, spurring the strong sequential 2QFY20 earnings momentum into FY21.

Outlook. Plant 12 consists of Block A and Block B, each consisting of 8 double former lines with 2,2b pieces each (total 4.4b pieces). As of now, block A (5 lines have already started commercial production), the remaining 3 lines are expected to be ready by 1Q 2020. For Block B, all 8 lines are expected to be fully commissioned by 2H 2020. Upon full commercial production in stages from 2QCY19 to end-4QCY20, installed capacity will rise 13.4% to 26.2b pieces per annum. Recall, it had completed the acquisition of a piece of land in Meru, Klang on which it plans to build three plants namely Plant 13,14 and 15 which will contribute another 13.2bn pieces of gloves to its total installed capacity over the next 5 years.

Reiterate OUTPERFORM. TP is RM2.00 based 20x CY20 EPS of 10.0 sen (at +1.5SD above 5-year historical forward mean). We like Supermax because: (i) the stock is trading at an unjustified 40% discount to peers’ average compared to a historical discount of 30%, and (ii) it is a prime beneficiary of favourable USD/MYR forex trend since they do not hedge their sales receipts.

Key risk to our call is longer-than-expected commercial operations of new plants

Source: Kenanga Research - 16 Mar 2020

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