Monday, October 19, 2009

Supermax (RM3.35): After a good rally, more legs for upside?

My humble answer is YES! Supermax has just released its 3QFY2009 quarterly results and the earnings are nothing short of magnificent!! Net profit for 3QFY2009 results were 155% y-o-y and 55% q-o-q higher. The better performance was due to stronger demand, greater operating efficiency, cost control and its OBM business which commands higher prices, leading to higher margins.

Currently, there are six listed glove companies, namely Top Glove, Supermax, Kossan, Hartalega, Latexx and Adventa. Let's compare the valuations of these six companies:

1. Top Glove: PER'09 - 15.2x
PER'10 - 12.9x

2. Supermax: PER'09 - 7.3x
PER'10 - 6.6x

3. Kossan: PER'09 - 11.7x
PER'10 - 8.8x

4. Hartalega: PER'09 - 13.3x
PER'10 - 10.9x

5. Latexx: PER'09 - 13.6x
PER'10 - 10.2x

6. Adventa: PER'09 - 16.0x
PER'10 - 10.8x

Supermax the cheapest: Supermax has the lowest forward PER of only 6.6x, which is grossly undervalued compared to average forward PER among peers of about 11x. Should Supermax trade at 11x, its share price could reach more than RM5.60. In addition, Supermax, being the world's second largest glovemaker after Top Glove, should trade close to Top Glove's valuation at 12.9x, which is double that of Supermax's.

Industry: Due to the strong demand for gloves worldwide especially with the emergence of developing countries such as Brazil, China & India which have an increased awareness of hygiene, coupled with the threats of viruses like HIV, H1N1 etc against a backdrop of lack of capacity expansion among glovemakers worldwide, glovemakers are clearly the beneficiaries. According to industry trends, glove demand is expected to have double digit growth. Assuming 10% growth p.a., the world will need some 170bn gloves by 2011, of which 55% could be supplied by Malaysian glovemakers. As such, Malaysian glovemakers are carrying out aggressive expansion plans to increase each of their capacities by 3-8bn pieces p.a.

Expansion: As for Supermax, it is planning to accelerate its expansion plans, bringing forward its expansion of 12 new production lines in Klang from Jan 2010 to Nov 2009. It also plans to refurbish some old lines and put in new lines in its Malacca and Sg Buloh plants which will raise its total capacity from 14.5bn to 17.7bn pieces by mid-2010. In addition to all these, it also intend to build a glove city in Klang, starting with its first plant there by 2011 which will have capacity of 3bn pieces p.a. Should all these go well as planned, the company will have about 20bn pieces p.a. capacity by 2011 from its current 14.5bn.

4QFY2009 to be better: Supermax has already booked its sales right up to Feb 2010, which means its 4QFY2009 results are more or less secured. Should they maintain their performance as 3QFY2009, their EPS could reach 47 sen in FY2009. With this, their PER'09 will only be at 7x, compared to peer PER'09 of 14x. This is a massive 50% discount.

Valuation: On the conservative side, Supermax should trade close to RM4.70 just by attaching PER'2010 of 10x. If it should trade close to Top Glove, its share price should break past RM5.00. I don't see any reason for Supermax to trade at this level of RM3.35 which has a lower PER compared to its smaller competitors like Hartalega or Kossan.

Disclaimer: The above article does not represent an investment advisory service as no subscription or management fees are charged. The contents of the article are provided as general information only and should not be taken as investment advice or as a recommendation to buy or sell any security or financial instrument. Any investment decisions carried out based on information, analysis, or commentary provided above is solely your responsibility. You should consult your investment adviser before making any investment decisions.

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