Supermax - FY12 earnings rise on sustained glove demand HOLD

- We reiterate our HOLD recommendation on Supermax Corp Bhd (Supermax), with an unchanged fair value of RM2.20/share, which is now UNDER REVIEW. Our fair value now represents a 22.2% upside to the current share price, given its recent weakness.

- Supermax registered a net profit of RM122mil (+13% YoY) for FY12 on the back of a 3% revenue growth. This is inline with both our, and consensus, forecast. Earnings growth would have been greater were it not for the higherthan-usual effective tax rate of 25% in 4QFY12 (FY12:13.3%; FY11: 7.2%), which management attributes to the under-provisioning in previous periods.

- Supermax’s turnover rose 31% compared to the previous quarter’s RM246mil following additional capacity from its new and refurbished lines. 4QFY12 net profit was up a mere 2% despite PBT’s growth of 25%.

- In view of the improved operating environment, Supermax’s EBITDA margin expanded 2.8ppts YoY to 14.4% in FY12. Its RM66mil manufacturing and process automation investment coupled with softer raw material prices in FY12 (latex and nitrile prices declined by 14% and 11%, respectively) had contributed to this expansion.

- In addition, Supermax’s move up the value chain to higherend nitrile and surgical gloves will be a boon to margins. At present, it has a nitrile capacity of 5.2bil pcs. However, once capacity from Plants 10 and 11 in Meru as well as from the refurbishment of its older plants come on-stream by end-FY13F, Supermax will have an installed nitrile capacity of 12 bilpcs per annum, which will account for 52% of its product mix.

- Meanwhile, 5 out of the 7 lines earmarked for surgical gloves production in its Sungai Buloh plant have commenced operations in May 2012. Management is confident that the group will be allocated the additional sterilisation capacity by October 2013 and that the additional packaging machineries will arrive very soon.

- While we are mindful of price competition in the nitrile segment setting in 2H13, we are not too concerned as demand growth is sustainable (+10% YoY). As it is, Supermax is in an oversold position with natural rubber gloves having a lead time of 45-60 days, nitrile gloves 4-5 months and surgical gloves 6 months.

- Supermax has declared a final gross DPS of 3 sen for 4QFY12, bringing total FY12 gross DPS to 5 sen (FY11: 4.75 sen). This represents a payout ratio of 28% (official policy of 30%) and a yield of 2.8%. Our FY13F gross DPS forecast of 6.75 sen translates into a yield of 3.8%.

Source: AmeSecurities