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.
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
2013-14.
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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Hi David,
ReplyDeleteis Johotin still worth holding?
can hold long term
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