Supermax Corporation - 1HFY12 below expectations

Period  2Q12/1H12

Actual vs. Expectations 1H12 net profit was recorded at RM58.0m. This number is within the consensus'’ full-year estimate of RM120.0m (~50%) but only accounted for 38% of our full-year forecast of RM154.4m.

The below than expected results were mainly driven by lower than expected top-line growth. The accumulative YoY revenue growth rate was almost flat at 0.3% in contrast to our growth forecast of 15%. Margin wise, the estimated net profit margin of 13.1% is not far from 1H12’s 12.0%.

Dividends           No dividend was declared.

Key Results Highlights

YoY, while the Group sold about 18% more rubber gloves but recorded a slight 2.4% decrease in revenue due to lower (about 20%) average selling prices (“ASPs”) in tandem with lower raw material prices in the past 1 year. However, the lower latex (~27%) and nitrile (~15%) prices and coupled with improved operating efficiency had led to improved PBT and net profit that rose by 39.1% and 32.5% YoY respectively.

QoQ, the Group’s revenue was lower by 6.6% but PBT and net profit rose by 8.4% and 7.1%, respectively, due to the above-mentioned reasons.

As a result, accumulative 1H12 net profit of RM57.9m was 26.5% higher than RM45.8m in 1H11 (despite a higher effective tax of 9.3% in 1H12 as opposed to 4.8% in 1H11) on the back of a flattish revenue growth of 0.3% (1H12: RM480.6m, 1H11: RM479.3). Again, the flat revenue was due to lower ASPs which was more than offset by strong improve in profit margins.

Outlook

We see a resurgent in the glove industry with the underlying downtrend in the industry’s main cost components - prices of natural rubber and nitrile.

On demand side, we understand that despite the slowdown in the Eurozone and US, demand for gloves, both natural rubber and nitrile, remains robust judging from the Group’s oversold position has lengthened to about 3½ months as buyers gradually move back to their normal buying pattern instead of buying the bare minimum in response to the extreme volatility in glove prices seen in the last 1½-2 years. Strong demand growth is also seen from other regions such as from the Middle East, Africa as well as Asia.

Revenue to be driven by capacity expansion going forward (see overleaf for details).

Change to Forecasts       While the results were below than expected, we maintain our earnings forecasts for now pending for our meeting with the management.

Rating   Maintaining OUTPERFORM due to approximately 17% upside from here to our TP.

Valuation            Our TP of RM2.50 is based on 11x to FY12 EPS of 22.7sen. The targeted PER of 11.0x is the lower end of its average historical PERs of 11.0x-13.0x.

Risks      Higher latex price and stronger ringgit.

Source: Kenanga