Supermax - Last of the lot to report result, in-line too HOLD

- We reiterate our HOLD call on Supermax Corporation (Supermax), with an unchanged fair value of RM2.20/share. This is based on a target PE of 10x FY13F EPS. 

- For the 9 months to 30 Sept 2012, Supermax registered a core net profit of RM90mil (9M11: RM82mil; +9% YoY). Sequentially, Supermax’s core net profit was up 5% to RM32mil in 3QFY12 from RM30mil in 2QFY12. We deem the results to be in-line with our and consensus estimates – making up 70% and 69%, respectively.

- Supermax declared a first interim dividend of 2 sen per share, payable on 18 January 2013. Our gross DPS forecasts of 5.3 sen and 6.8 sen for FY12F and FY13F, respectively, follow management’s guidance of a 30% payout ratio. At the current price, this translates into dividend yields of 2.6% and 3.4%, respectively.

- Although Supermax’s 9MFY12 revenue slipped 3% YoY, we are not too concerned as this was largely due to the lowering of its average selling prices (ASP) (3Q12 vs. 3Q11: -11% to -22%) in tandem with the decline in raw material prices (latex: -16% YTD; nitrile: -17%). QoQ, revenue was up 6%.

- Going forward, we expect rubber glove volume to rise given the higher uptake from sustained re-stocking activities. As it is, Supermax currently has a lead time of 2 months for its natural rubber gloves and 4 months for nitrile gloves. 

- We believe Supermax is in a position to gain from a surge in demand as its expansion plans are on course. Five out of its 7 new surgical lines have been commissioned since May 2012 while its bid to build two new plants and upgrade its older lines will be completed by 4QFY13. These plans will see its surgical glove capacity rising by 10-fold to 336mil pieces and nitrile glove capacity by more than double to constitute 52% of its product mix by FY13F.

- Supermax’s EBITDA margins expanded 1ppt QoQ to 16.6% for 3QFY12 and by 2.4ppts YoY to 14.3% for 9MFY12 despite the slight dip in revenue. Besides the larger decline in input costs, we attribute this to Supermax’s higher operating efficiencies as more of its processes become automated. Supermax has set aside ~RM92mil for capex to upgrade its old lines and mechanise its production facilities.

- We also understand that the decline in its associates’ contribution was a result of Supermax Canada Inc becoming a 67%-owned subsidiary and not due to any losses experienced by its associates. 

- We believe Supermax’s focus on its own brands and distribution network has enabled it to protect its margins and create a niche in the rubber glove sector.   

Source: AmeSecurities