Thursday, August 22, 2013

Supermax (Current Price: RM2.25; TP: >RM2.70): Super laggard (As described by Maybank today)

After the sell-off over the past two days, I feel more comfortable recommending this stock now. In addition, many stocks have moved up a lot over the past one year but Supermax just managed a paltry 8.3% increase over the past one year. This pales in comparison to Kossan's +83.4%, Hartalega's +52% and Top Glove's +15.7%. Therefore, I think it's quite safe to go in at current levels.

As you all might have already known, one of the main reasons for the poor performance was Stanley Thai's support for Pakatan Rakyat during the recent general elections, coupled with its weaker margins in the previous quarter (1Q13) which raised investors' concern over its ability to pass on higher costs to its customers.

However, I feel Supermax's discount to its peers is unjustified. Maybank correctly stated in today morning's report that Supermax is a super laggard. Just compare Hartalega's PER 2012-13 of 20.5x/19.5x, Top Glove's 17.7x/17.3x and Kossan's 16.2x/14.5x with Supermax's  pathetic 12.2x/10.8x, Supermax is trading at a whopping 35% discount or more to its peers. How can???
With the appreciating USD, raw materials remaining relatively low and stable, its anticipated recovery in its profit margins in 2Q13 coupled with its expansion in the end of this year and  greater automation of its manufacturing processes, Supermax is poised to rerate and catch up with its peers. Stanley's political alignment is a non-issue to me as most of its products are exported to overseas anyway and are not dependent on local demand.

Valuation: Fair value could easily reach above RM2.70 by attaching PER of 12x to its EPS for 2014. And that is still at about 20% discount to its peers. The stock is highly liquid which is favourable among institutional investors. Definitely a stock to watch out for!

Some updates from various research houses:

Nitrile glove expansion:  Growth  is  expected  to  come  from  12  replacement lines and 2 new plants over FY13 and FY14.  The Company has plans to increase nitrile production  capacity  from  6.9  billion  pieces  to  12.3  billion  pieces  per  annum,  52%  of the  total installed capacity. These additional nitrile production lines have  the ability  to switch  between  nitrile glove and  natural  rubber glove  production.  As  of  now,  12  new nitrile  lines  with  1.43b  pieces  additional  capacity  is  already  commercially  operational. The  remaining  planned  production  lines  are  on  track  for  commercial  production gradually, starting  from 4Q 2013 instead of 3Q 2013. Due  to strong demand  for nitrile gloves,  Supermax  is  currently  facing  an  oversold  position  of  two  to  three  months.  In addition, the latest quarterly results by Hartalega (Nitrile glove producer) revealed that global  demand  for  nitrile  gloves  will  be  robust  with  around  20%  growth  annually  in

Strengthening USD will benefit glove manufacturers: Supermax is a beneficiary of  the  weakening  of  the  Ringgit  since  they  do  not  hedge  its  US  dollar  receipts.  Since sales are USD  denominated,  theoretically, a  depreciating  ringgit against  the  dollar will lead to more ringgit revenue receipts. A 1% depreciation of RM against USD is expected to boost net profit by 1-2%.

Margins to improve:  Management  has  guided  that  1QFY13  margin  erosion  is one-off  and  unlikely  to  recur.  Instead,  2QFY13  results  to  be  released  in  Aug  2013  is expected to show margins improvement compared to 1QFY13 as the lag effect in raising ASPs wore off starting from 2QFY13. 1QFY13 margins fell due to higher labor expenses arising  from minimum  wage  policy  and  the  higher  cost  was  not  fully  passed  on  to  its customers. Typically, customers are given two to three month notice before new ASPs can  take effect. As such, margin  recovery will start due  to an estimated 3-5% increase in ASPs, already  notified  to  customers in  Jan  2013, which will kick in  from  the  second quarter onwards.

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