Supermax to benefit from weak Ringgit
KUALA LUMPUR: CIMB Equities Research has downgraded glove maker Supermax Corporation Bhd
from Add to Hold with a lower target price of RM2.15 after incorporating its lower earnings estimates.
It said on Monday the downgrade was based on 11.5 times CY18 P/E (-one standard deviation of its five-year historical mean) from 12 times.
“Despite trading at a 54% discount to the sector average, we remain cautious on the group’s outlook due to weak earnings visibility and continuous uncertainties over infrastructure issues that have been crippling its expansion plans.
“Any re-rating lies in the resolution of these issues. Downside/upside risks: weaker/stronger-than- expected sales volume,” it said.
For the first half of its financial year (1HFY17), Supermax’s net profit of RM42.1mil was below expectations, making up only 35% of its and 32% of Bloomberg consensus estimates.
The 1HFY17 revenue and net profit declined by 15.8% and 45.5% on-year, respectively. This was mainly due to: i) lower production output from ongoing revamp and ii) higher operating costs.
Note that there was a high base effect in 1HFY16 from low raw material prices and sharp appreciation of US$/RM. Accordingly, earnings before interest and tax (EBIT) margins waned to 10.4% (-4.9% pts).
On a quarter-on-quarter basis, 2QFY17 net profit improved 15.5% to RM22.6mil despite revenue declining 12% on-quarter.
“We think that the weaker revenue was mainly due to additional production lines undergoing revamp, leading to lower sales volume. On the other hand, the 15.5% on-quarter growth in net profit was thanks to: i) currency gains from appreciation of the US$/RM and ii) lower tax rates (-7.2% on-quarter).
“Supermax launched its own brand of contact lenses in Dec 16, which is sold under the Aveo brand. The retailing of this product has begun in Hong Kong, with further plans to venture into South American markets and Japan as well.
“Plans for this have been signaled by its RM1.2mil acquisition of a contact lens trading company that has a highly experienced sales team in Japan.
“Nevertheless, we only expect material earnings contribution from this segment in 2018 upon better brand establishment.
“Given the weaker-than-expected results, we are lowering our FY17-19 EPS by 11%-13.8%. This is to take into account the prolonged revamping works on its production lines as well as delays in the commissioning of new capacity.
“We suspect that the group is still unable to resolve the infrastructure issues bogging down the commissioning of the remaining six lines in Plants 10 and 11. Downgrade to Hold,” CIMB Research said.
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