Supermax (SUCB MK, BUY, FV:2.50, CL:RM1.99)

Supermax held an analyst briefing  yesterday to update investors on its strategy going forward.  Management  is  targeting  to increase  its  mix of  nitrile gloves  to 50% by 2013 from the present 35% to cash in on the changing demand for natural rubber and nitrile gloves. It also expects to unveil new glove products by 2QFY12 that  will contribute  earnings by 3QFY12. We  are  positive on  the company’s strategy going forward. Maintain Buy.

Ramping up nitrile glove (NBR) mix to 50%, or 10bn pieces a year, by 2013. This is a significant shift in product mix and an increase from the current NBR portion of 35%. To implement this, the company will replace the older natural rubber (NR) lines in its existing factory (Lot 6070) to make way for capacity to produce 1.4bn pieces of nitrile gloves while its new factory in Glove City (Lot 6058) will provide annual capacity for 3.8bn pieces. The earnings contribution from both Lot 6070 and 6058 should come in by 3QFY12 and 2013 respectively.

Unveiling new products in 2QFY12; earnings to flow by 3QFY12. Supermax expects to launch new glove products  globally  starting from 2QFY12. Although the company did not reveal the type of glove to be produced, we  surmise that it may be a mix of NR and NBR gloves, and that it would be lighter and thinner. Our guess is that it would also be an examination glove since  more than  90% of  the company’s  products  target the medical segment.

NR latex price to come down in 2H12. Although management acknowledged that NR latex price would continue to be volatile due to over-speculation and intervention by the Thai government, it expects prices to begin to trend down again from 2H12. This would be on the back of: i) new NR latex supply from Cambodia and South Vietnam; ii)  declining demand for NR latex as existing NR glove producers gradually shift to NBR gloves, and iii) the market preference for thinner gloves, which would mean that less NR latex will be used eventually. As such, management expects NR latex price to drop to RM6.00/kg. We think that the price could fall to this level if there is no floor price for hard rubber (proposed at RM11.84/kg) and the tension in Iran does not stoke a further rise in crude oil price.

Maintain Buy. Our fair value for Supermax remains unchanged at RM2.50, based on the existing PER of 13x FY12  EPS. We are positive on its move to go big  on  NBR as the examination glove market is  a  dynamic  one where  preferences for glove  types may change rapidly, especially when a price difference arises.

Source: OSK188