Supermax Corp - Profit Spikes as Latex Price Slides

Supermax’s 1HFY12 core earnings of RM58m were within expectations, representing 45% and 46% of our and consensus’ full-year estimates respectively. Revenue was flat y-o-y but due to better cost efficiency and lower latex prices, the group’s core earnings shot up 23% y-o-y. With the earnings largely in line, we are maintaining our forecast and BUY call for now. We also take this opportunity to roll over our valuations to FY13, pegged at an unchanged PE of 13x. This pushes up our FV to RM2.70 from RM2.50 previously. Supermax should continue to see healthy results in the upcoming quarters, boosted by higher production capacity as well as the introduction of new products. Maintain BUY.

Largely in line. Supermax’s 1HFY12 results were within consensus and our expectations, with its 1H core earnings making up 45% of our full FY12 forecast. On a YTD basis, revenue was flat, ticking up by only 0.3% to RM481m despite an 18% jump in rubber gloves sold y-o-y. We attribute this to the lower average selling prices. Nonetheless, the group’s YTD PBT and core earnings jumped 29% and 23% y-o-y respectively to RM64m and RM58m, thanks to lower raw material costs which fell by 27% during the quarter (mainly latex), as well as improved operating efficiency at its factories across the board. On a q-o-q basis, the group’s revenue slipped slightly by 7% owing to lower average selling prices. However, the better operating efficiency as well as prudent cost control led to an improvement in PBT and core earnings, which went up at a healthy 8% and 7% growth pace respectively to RM33m and RM30m.

Margins expand as latex price sinks. We note that the average latex price dropped 4% q-o-q (the average 1QCY12 price was RM7.46/kg vs RM7.16/kg in 2QCY12). This resulted in increases in Supermax’s EBITDA, PBT and core earnings margins, which widened by 400bps, 200bps and 165bps q-o-q respectively. Latex prices - currently at RM5.33/kg - have been easing due to tepid demand for rubber as a result of a slowdown in the automotive industry. That said, we believe that the decline in vehicle sales has led to delays in restocking by tyre manufacturers, which has in turn dampened the demand for natural rubber. In the near term, we expect latex prices to remain weak on expectations that demand would remain lacklustre for the rest of the year. As such, glove manufacturers may still enjoy a fair degree of margin expansion as they benefit from the time lag in passing on the lower latex cost to their customers.

Government measures to boost NR prices. Last Friday, StarBiz reported that the International Tripartite Rubber comprising the world’s three largest rubber producers Malaysia, Indonesia and Thailand are considering curbing exports by, among others, cutting trees to ease the volatility in latex prices. We believe that the recent downtrend in latex prices – hitting its lowest intraday price of RM5.22/kg last Friday – as well as the high volatility of NR versus nitrile (NBR) prices, were the main few reasons that sparked off the fall in NR companies’ share prices vis-à-vis NBR producer Hartalega (NEUTRAL, FV RM4.83). Last Friday, the share prices of the NR glove makers Top Glove (BUY, FV RM6.00) and Supermax (BUY, FV RM2.70) fell 1.1% and 4.5% respectively vs Hartalega’s 3.8% gain. We believe that measures to curb exports such as by cutting trees are not feasible since this will ruin the livelihood of rubber tappers. Nonetheless, should the three governments decide to restrict exports to boost latex prices, we do not think this will make a significant impact on glove players, especially their operating margins, as they are able to pass on the costs to their customers. Furthermore, with the increasing automation of Supermax’s production lines moving forward and the introduction of new glove products, we are positive that the group’s margin will stay at a healthy 10%-15%.

Maintain BUY. Supermax’s sales volume may be affected in the event of any economic crisis since about 30% of its rubber gloves are sold to Europe. However, we are of the view that the favourable exchange rate and lower production cost due to lower material cost prices and higher operating efficiencies would more than compensate for the lower sales. With the company’s earnings largely in line, we are maintaining our earnings projection for now, as well as increase our FV from RM2.50 to RM2.70 as we roll over our valuations to FY13 based on a PE of 13x.

Source: OSK