MD: Our shares are grossly undervalued
Supermax Corp Bhd, once the darling of investors chasing rubber glove stocks, is now going through a much different phase in its life cycle.
It is trading at a lower earnings multiple than its peers. Supermax’s shares are currently trading at a historical price earnings multiple of 19.72 times earnings, compared with Top Glove Corp Bhd’s 23 times, Hartalega Holdings Bhd’s 31 times and Kossan Rubber Industries Bhd’s 24 times.
Interestingly, in the month of March, Supermax’s management bought back more than three million shares from the open market.
The share repurchase is valued at some RM6.37mil and the company now has a total of 12 million shares kept in its treasury, or close to 1.8% of its total share base.
The strong pace of share buy-backs in such a short span of time has prompted some speculation as to whether its owners are mulling a privatisation of the company.
Many companies on Bursa Malaysia have been privatised simply because their owners reckon that the open market has not been fully valuing them.
However, Supermax group managing director and single largest shareholder Datuk Seri Stanley Thai tells StarBizWeek that there are no plans in the near term to privatise the company, and that he wants to maintain the listing status of Supermax.
“We think our shares are grossly undervalued, hence the share buybacks,” he says.
Supermax’s share price is down 5% year-to-date.
According to CIMB Research, the company’s first-half of financial year 2017 (FY17) earnings were below expectations, making up only 32% of Bloomberg consensus estimates. This, in turn, was mainly due to a lower production output from ongoing revamping works and higher operating costs.
According to Bloomberg data, Supermax, with a market capitalisation of RM1.34bil, is trading at 1.26 times its book value, making it one of the lowest among its peers.
In comparison, Top Glove, which is the world’s largest rubber glove manufacturer by capacity with a market capitalisation of RM6.46bil, is trading at a book value of 3.47 times, while Hartalega is at 4.9 times book.
In Supermax’s case, there is also a perception in the market that negative political sentiment may have an impact on investor interest in the stock. This is given that Thai was perceived to be publicly speaking in support of the opposition in the last general election (GE).
However, later reports have seen him distancing himself from the Opposition, saying that he was merely exercising his right of opinion as a citizen during the last GE.
He noted that he was merely being “vocal” during the 2013 GE and this could have been open to misinterpretation as an endorsement by certain parties.
Despite the undervaluation of its shares by the market, the company has got several things going for it.
For example, the company’s diversification into the eye care sector with a contact lens manufacturing business is starting to gain traction, as Thai expects this business to break even this year and contribute positively to its earnings moving forward.
He also anticipates an expansion in export markets for the contact lens when it eventually obtains more certifications on its product.
“We are now expecting to receive the CE Mark anytime soon. And we have already received the US Food and Drug Administration clearance to market in the United States,” Thai says.
The CE Mark is a mandatory testing for some products sold within Europe, and obtaining this certification will open doors for Supermax to export to the region.
CIMB Research in a recent report said it is expecting the contact lens division to significantly contribute to Supermax’s overall earnings only in FY18 ending June 30.
It notes that the retailing of the product has already begun in Hong Kong.
On the rise in latex prices, the company says it would be able to cope with this, as it usually passes on these additional costs to its customers.
Supermax and its peers, due to them being export-oriented by nature, had seen good gains in their financial performance due to the strengthening of the US dollar.
Its second quarter ended Dec 31 saw the company reporting an RM22mil net profit against a revenue of RM236.7mil. There is no year-on-year comparison available due to the change in the financial year-end earlier.
Supermax says in its financial statements that revenue was derived from the sales of its natural and nitrile rubber gloves, while in terms of profit margins, it recorded earnings before interest, taxes, depreciation and amortisation and pre-tax profit margins of 16% and 11.4%, respectively.
On a quarter-on-quarter basis, second-quarter net profit improved 15.5% to RM22.6mil, while revenue declined 12%.
CIMB Research says in a report that it thinks the weaker revenue was mainly due to additional production lines undergoing revamping works that led to lower sales volume.
The research house notes that the 15.5% quarter-on-quarter growth in net profit was due to currency gains from the appreciation of the US dollar against the ringgit and from lower tax rates that dropped 7.2% quarter-on-quarter.