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Monday, April 20, 2020

Supermax Corporation - Unwarranted 50% PER Discount to Bigger Peers

Stage is now set for a solid FY21 earnings growth amplified by re-stocking activities ramp-up due to the current pandemic and further boosted by better margins from higher ASP. On PER basis, it is trading at an unwarranted 50% discount compared to the historical 30% to its bigger market capitalized peers. We also raise our FY21E net profit by 8% and roll forward our valuation from CY20E to CY21E. Hence, TP is raised from RM2.00 to RM2.50 based on 21x CY21E EPS (at +1.5SD above 5- year historical forward mean). Reiterate OP.

Higher volume sales and ASP; longer delivery lead times. Longer delivery lead times are indicating that demand will outstrip supply at least over the medium-term. The initial Movement Control Order (MCO)-led supply chain hiccups have been resolved with the group’s production running at 100%. Additionally, industry is raising ASPs by 3-5% or between USD0.30 to USD0.50 per thousand pieces which is not excessive per unit cost due to incremental cost. We believe SUPERMX will benefit from the robust demand which has led to longer industry delivery lead times (the moment order was placed to delivery) which has risen to an average of between 80 to 100 days as compared to 40 to 50 days normally. Signs of demand outstripping supply could potentially lead to higher ASPs. Looking at the stable raw material prices, ceteris paribus, hikes in ASPs are expected to lead to margins expansion.

Acquired two pieces of land over the past 12 months. Looking ahead, growth beyond FY21 is underpinned by capacity expansion via two land acquisitions. SUPERMX recently acquired a piece of industrial land for RM20m measuring 4.1 acres while back in July 2019 the group had acquired a piece of land measuring 16.1 acres for RM65m. Both lands are adjacent to its current Maxter Plant in Klang the merged and enlarged land tract and subsequent expanded facility within the vicinity of its Maxter Plant should yield operational synergies and greater economies of scale. The 16.1 acres land is earmarked for plant 13,14 and 15 with an estimated capacity of 4.4b pieces for each plant over the next few years. The 4.1 acres land is slated for one plant with an estimated capacity of 4.7b pieces per annum.

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, for Block A, its remaining 3 lines started commissioning in end March 2020 on top of the 5 lines already in commercial production. For Block B, all 8 lines are expected to be fully commissioned by 2H 2020. Upon full commercial production by 2H 2020, installed capacity will rise 13.4% to 26.2b pieces per annum.

Raised FY21E net profit by 8% after raising utilisation rate from 70% to 79%. We keep our FY20E earning unchanged as we have sufficiently factored the growth into our earnings model.

Unwarranted 50% PER discount valuation to the big market capitalization peers. Reiterate OP. We roll forward our valuation from CY20E to CY21E. Coupled with the earnings upgrade, our TP is raised from RM2.00 to RM2.50 based 21x CY21 EPS of 11.8 sen (at +1.5SD above 5-year historical forward mean) from 20x previously. We like Supermax because the stock is trading at an unjustified 50% discount to bigger peers’ average valuation compared to a historical discount of 30%. We highlight again that the 50% valuation discount to bigger cap peers appears conservative.

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

Source: Kenanga Research - 20 Apr 2020

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