Supermax Corporation - Making its way steadily

-  Following a recent discussion with management, we are maintaining our HOLD recommendation on Supermax Corp (Supermax), with a slightly lower fair value of RM2.15/share (vs. an earlier RM2.20/share). Our fair value is based on an unchanged PE of 10x FY13F EPS.

-  Supermax’s lower fair value stems from a 4% cut in both FY13F and FY14F net profit to RM145mil and RM162mil, respectively, following management’s guidance of a higher effective tax rate of 13% (FY11: 7%; FY12: 13% vs sector peers: >20%).

-  Management has clarified that the group is close to full utilisation of its reinvestment allowance (RA) claims, save for one last subsidiary, and that the Ministry of International Trade and Industry has refused an RA extension for the sector.

-  Nonetheless, the impact will be cushioned by a stronger topline growth of 17% in FY13F and 11% in FY14F on the back of:- (1) an increase in ASPs of 3%-4% in tandem with the rise in labour costs; and (2) new capacity coming on stream to feed the global appetite for rubber gloves (4Q12 volumes +13% QoQ; FY13F: +10%).

-  We understand that the group’s expansion plans to increase its installed capacity by 30% (or 5.4 bil pcs of nitrile gloves) to 23 bil pcs in FY13F are progressing well. Nonetheless, we caution that increased overall capacity in this segment could lead to price competition in 2H13, resulting in lower segment margins of 11%-15% (from 20%, previously).

-  Stable raw material prices, (55% of total costs) coupled with the assumption of no reduction in gas subsidy will see Supermax’s EBITDA margins rise marginally to ~15% in FY13F. In addition, greater contribution from the higher-end nitrile (FY13F: 52% of production vs FY12: 35%) and surgical gloves (10-fold capacity increase) will give an added boost to the group’s margins.

-  Supermax remains committed to growing its downstream activities. It intends to leverage on its OBM business (69% of sales) to raise sales contribution from the emerging markets from 6% presently to 10% in the coming years. As such, it is looking at setting up distribution centres in Egypt and Uruguay to expand its MENA and Latin America network.

-  In line with our revised net profit estimates and management’s 30% payout ratio, we now forecast dividends of 6.5 sen and 7.25 sen for FY13F and FY14F (FY12: 5 sen), translating into average yields of 4%.

-  The stock is currently trading at its 5-year mean PE of 9x FY13F earnings. We believe the slight premium above its mean is warranted given its strong brand value.

Source: AmeSecurities