Supermax Corporation - 12MFY12 within expectations

Period  4Q12/12MFY12

Actual vs. Expectations  The 12M12 net profit of RM120m came in within expectations, accounting for 98% and 95% of ours and the consensus full-year net profit forecasts.

Dividends  A final tax-exempt DPS of 6% or 3 sen was proposed, bringing the total tax-exempt FY12 DPS to 5 sen.

Key Results Highlights  QoQ, the revenue rose 31% to RM322m, which we believe was due mainly to sales volume growth on the back of a declining raw material price as well as new capacity from its new and existing refurbished lines. In tandem with top line growth, the PBT grew 25% despite the slight PBR margin contraction of 13.1% compared to 13.8% in 3QFY12. However, the net profit only rose 1.5% due to a higher tax provisioning as a result of underprovisions in the past few quarters.

 For the full year, the 12MFY12 revenue rose marginally by 2% to RM1.0b on the back of stronger rubber gloves volume sales, which negated the impact of a fall in the ASPs. The sharp -25% YoY decline in the average latex price has correspondingly led to lower ASPs, which were passed on as cost savings to customers. The lower latex price helped lift the EBITDA margin by +2%ppt YoY to 16.6% in 12MFY12. Consequently, despite a higher effective tax rate of 13.3% (FY11: 7.2%), the 12MFY12 net profit grew by +16.7% YoY to RM120m, accounting for 98% and 95% of ours and the consensus full-year net profit forecasts.

Outlook  Two new plants are expected to start production by end-4Q2013 and will boost the production of nitrile gloves by 6.8b pieces of gloves or 76% increase to 12.0b gloves p.a.

 The targeted product mix will be 52% nitrile and 48% natural rubber.

 Raw material costs are expected to remain stable, if not declining further, for the rest of the year. However, the latex price may be supported during the winter period (between Feb and May) for rubber trees. While we believe that the declining trend in the raw material prices could improve glove makers’ margins, this benefit will eventually be passed down to purchasers via lower average selling prices (ASPs).

 In order to mitigate the effect of the minimum wage, Supermax has moved into automation, which is in line with the other industry players. This will eventually lead to better operation efficiency and hence profit margins.

Change to Forecasts   No change to our estimates.

Rating    Maintain MARKET PERFORM rating and our earnings estimates pending Supermax’s results briefing.

Valuation  Our TP of RM2.20 remains unchanged. This TP represents a 10.3x PER to our FY13F EPS of 4.3 sen. The targeted PER is at a +1SD level above the 2-year forward PER average.

Risks  Higher latex prices and a stronger ringgit.

Source: Kenanga