7/27/2019 TA Securities Supermax Ripe for the Picking

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TA SecuritiesA Member of the TA Group

C O M P A N Y U P D A T E

Monday, July 22, 2013

FBM KLCI: 1,797.74

Sector: Manufacturing

MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048

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Supermax Corporation Berhad TP: RM 2.70 (+26.8%)Ripe for the Picking! Last traded: RM2.13

THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* BUYTA Research Team Coverage +603-2072-1277 ext: 1612 paulyap@ta.com.my www.taonline.com.my

Trouble in Paradise

Supermax is currently experiencing issues with its Brazilian operations. Coupled

with the slashing of prices by local glove manufacturers, the depreciation of the

Brazilian Real has made glove imports less competitive. As a result, Brazilian

customers have been increasing their purchases of locally manufactured gloves.

This has led to a decrease in profit contribution from Supermaxs South

American operations in the 1QFY13 as share of profit of associated companies

decreased to RM3.1mn from RM8.9mn. That said, management believes the

situation will improve in the future due to the unsustainability of prices offered

by local manufacturers. We opine that this is reasonable due to the relative size

of Malaysian glove manufacturers in comparison to their Brazilian counterparts.

Delays in Expansion

Lot #6058 and #6059 have been delayed due to contractor issues. Initially

scheduled to begin commissioning between June and September, the new

targeted timeline is now towards the end of the year. Assuming no further

hiccups, the factories will be fully commissioned by the first quarter of 2014. To

recap, Lot #6058 will have 16 lines producing 2.15bn pieces of gloves/year and

Lot#6059 with 24 lines manufacturing 3.22bn pieces of gloves/year. Taking this

into account, we readjust our year-end total installed capacity assumption backto 17.76bn pieces of gloves/year. More importantly, due to the delay, we opine

that Supermax may not be able to take full advantage of continued resilient

demand for nitrile gloves.

On to the surgical side, all seven lines for Lot 42 are ready. Despite this, only

four out of the possible seven lines are running pending arrival of the remaining

packaging machines. The three packaging machines are expected to be delivered

in October. At full capacity, Lot 42 has the potential of producing 336mn pairs of

surgical gloves/year. Assuming a profit margin of 15%, this could potentially

yield a profit of RM32.3mn once fully commissioned. In regards to the shortage

of sterilization facilities, management remains optimistic that the supply of

these facilities will increase in the near future. Currently, we have only imputedearnings from the four lines, which are running at full capacity.

Update on Glove City Project

In the absence of gas supply, Supermax may look towards biomass to kick start

its Glove City Project. However, we have been advised that the usage of biomass

is only applicable for one out of the six planned factories. The remaining five

factories will still be reliant on the availability of gas supply. In the worst case

scenario, Supermax may opt for the purchase of new land with existing gas

supply in order to continue their expansion plans. We view this news as positive

it provides clarity towards Supermaxs future plans pending the eventual

completion of Lot #6058 and #6059.

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Share Information

Bloomberg Code SUCB MK

Stock Code 7106

Listing Main Market

Share Cap (mn) 679.2

Market Cap (RMmn) 1446.7

Par Value 0.50

52-wk Hi/Lo (RM) 2.25/1.79

12-mth Avg Daily Vol ('000 shrs) 1910.0

Estimated Free Float (%) 53.1

Beta 1.4

Major Shareholders (%)

Forecast Revision

FY13 FY14

(4.6) 4.2

129.5 164.9

Consensus 137.2 153.8

94.4 107.2

Financial Indicators

FY13 FY14

Net gearing (x) 0.1 0.0

CFPS (RM) 0.3 0.2

P/CFPS (x) 7.1 8.6

ROAA (%) 10.0 11.8

ROAE (%) 14.7 16.8

NTA/Share (RM) 1.3 1.5

Price/ NTA (x) 1.6 1.4

Share Performance (%)

Price Change SUCB FBM KLCI

1 mth 8.1 1.43 mth 7.0 4.7

6 mth 10.9 10.5

12 mth (2.7) 10.2

Previous Rating Buy (Maintained)

Dato' Seri Stanley Thai - 20.44

Datin Seri Cheryl Tan - 15.13

Forecast Revision (%)

Net profit (RMm)

TA's / Consensus (%)

(12-Mth) Share Pricerelative to the FBM KLCI

Source: Bloomberg

7/27/2019 TA Securities Supermax Ripe for the Picking

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TA SecuritiesA Member of the TA Group 22-Jul-13

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Changes to Earnings

From the information gathered, we make the following adjustments to our

model:

1. Taking into account the delays, we decrease our total FY13 year-end capacityfrom 23.13bn gloves/annum to 17.76bn gloves/annum.

2. We increase the total installed capacity for surgical gloves for FY14 from174mn to 336mn. However, due to potential problems in regards to the

availability of sterilization facilities, we only impute a utilization rate of 70%.

3. Given challenges in the Brazilian operations, we decrease our assumed sharein profit of associated companies by 30%.

Imputing these changes, we adjust our FY13/FY14/FY15 estimated earnings

from RM135.7mn/RM158.3mn/RM161.0mn to RM129.5mn/RM164.9mn/

RM170.8mn.

Undemanding valuations

Incorporating higher FY14 earnings, we revise our TP upwards from

RM2.60/share to RM2.70/share. Our valuation is based on a 20% discount to

the industrys targeted PE multiple of 14x. The rationale for the imposed

discount is due to the difficulties in obtaining gas supply with regards to their

Glove City Project. Nevertheless, we believe our implied FY14 PER ratio of 11.2xis undemanding compared to the industry average of 14.3x (see Table 2). With a

total potential upside of 30.2%, we reiterate our BUY call on Supermax.

Table 1: Earnings Summary

FYE Dec 2011 2012 2013F 2014F 2015F

Turnover 1,021.4 997.4 1,224.4 1,450.5 1,471.8

Pretax profit 112.1 137.3 149.5 190.3 197.1

Net profit 104.2 121.7 129.5 164.9 170.8

EPS (sen) 30.6 17.9 19.0 24.2 25.1

EPS growth (%) (34.5) (41.6) 6.4 27.3 3.6

PER (x) 7.0 11.9 11.2 8.8 8.5

Dividend (sen) 6.5 5.0 5.7 7.3 7.5

Dividend yield (%) 3.1 2.3 2.7 3.4 3.5 Table 2: Peers Comparison

Price TP Mkt Cap FY13 FY14 FY13 FY14 FY13 FY14

(RM) (RM) RM mn (sen) (sen) (%) (%) (x) (x)

Top Glove 6.15 7.10 BUY 3,812.4 33.6 38.8 2.7 15.4 18.3 15.9

Supermax 2.13 2.69 BUY 1,446.7 19.0 24.2 6.4 27.3 11.2 8.8

Hartalega 6.64 7.15 BUY 4,873.8 32.0 36.4 (42.0) 13.8 20.8 18.2

Simple average 3,377.6 28.2 33.2 (11.0) 18.8 16.7 14.3

EPS EPS Growth PER

FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14

(x) (x) (x) (x) (%) (%) (sen) (sen) (%) (%)

Top Glove 2.2 2.4 2.8 2.6 15.6 16.6 17.2 19.8 2.8 3.2

Supermax 1.3 1.5 1.6 1.4 14.7 16.8 5.7 7.3 2.7 3.4

Hartalega 1.0 1.2 6.4 5.4 33.8 31.8 14.5 16.4 2.2 2.5

Simple average 1.5 1.7 3.6 3.1 21.4 21.7 12.5 14.5 2.6 3.0

NTA/Share Div yieldP/NTA ROE DPS

Disclaimer

The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed andopinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts.We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may

have an interest in the securities and/or companies mentioned herein.

for TA SECURITIES HOLDINGS BERHAD(14948-M)MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048

(A Participating Organisation of Bursa Malaysia Securities Berhad)Kaladher Govindan Head of Research