Supermax upgraded to ‘outperform’

  • Business
  • Friday, 08 Mar 2013

Supermax will incur additional labour cost at an average of RM1mil per month due to the minimum wage policy, or RM13mil per annum (9% of its 2013 net profit), according to Kenanga

Supermax Corp Bhd

By Kenanga Research

Outperform (upgrade)

Target price: RM2.20

THE management has shed more light on the company's earnings before interest, tax, depreciation, and amortisation (EBITDA) contraction.

Recall that EBITDA for the company's fourth quarter for the financial year ended Dec 31, 2012 rose 18% quarter-on-quarter to RM50.7mil despite the EBITDA margin being compressed to 15.7% compared with 17.4% in the third quarter.

The erosion was actually due to foreign exchange losses and the additional cost incurred as a result of teething problems in the implementation of its automation and computerisation of its manufacturing processes. Elsewhere, the revenue rose 31% quarter-on-quarter, driven by higher sales volume (+13%) and average selling prices (ASPs) (+16%).

Volume grew across the board on the back of an utilisation rate of 89% in the fourth quarter compared to 79% in the third quarter. In terms of product mix, latex gloves accounted for 60% (third quarter: 64%) and nitrile accounted for 40% (third quarter: 36%).

Supermax has raised its rubber glove ASPs by US$0.75 per 1000 pieces to US$1.25 per 1000 pieces (3% - 4%) to between US$24 per 1000 pieces and US$31 per 1000 pieces with effect from Jan 1, 2013 to mitigate the effect of the minimum wage policy.

We have already factored these revised ASPs into our earnings model. We understand that Supermax will incur additional labour cost of an average of RM1mil per month due to the minimum wage policy or RM13mil per annum (9% of its 2013 net profit).

Ceteris paribus, assuming a no cost pass-through' scenario and cost savings from levy borne by foreign workers, the minimum wage policy is expected to hit Supermax's bottom line by 7% based on our back-of-the-envelope calculation.

However, with the hike of 3% to 5% in ASP, the net impact is estimated at 6% of 2013 net profit.

To further reduce its reliance on manual workers to minimise the effects of the minimum wage policy, Supermax has invested in the automation and computerisation of its manufacturing processes and this is expected to be completed by end-2013.

Some of the automations put in place include the automated mechanical stripping system (removing gloves off hand moulds) and glove puller and stacker system. Once completed, Supermax's expect a cost savings of 40% to 50% on its labour costs.

However, we believe the full effect from this will only be felt from 2014 onwards.

On Lot 6070, the de-commissioning of the old lines with 12 new lines or 1.43 billion pieces of gloves (converting from the latex-based glove to nitrile) is now commercially ready.

For illustrative purposes, based on a net profit margin of 10%, ASP of US$28 per 1000 pieces and 1.43 billion pieces, this would generate a total net profit of RM12mil or 8% of 2013 net profit. The other two plants namely Lot 6059 and Lot 6058 are expected to be on track to commission commercial production gradually starting from June 2013. Lot 6059 and 6058 will have 24 and 16 production lines producing 3.2 billion and 2.2 billion pieces of nitrile gloves respectively.

This will bring its total nitrile production capacity from 6.9 billion to 12.3 billion pieces per annum or 52% of the total installed capacity. The first line is expected to commence from June 2013. All in, we estimate that Supermax will incur a total estimated capital expenditure of RM60mil in 2013, which we have factored into our earnings model.

We are positive on Supermax's decision not to venture upstream including investment into rubber plantations due to its long gestation period. Instead, Supermax will focus on global sales and marketing, distribution and making inroads into new markets (like Turkey, Egypt and Uruguay) and growing its market shares via its own brand manufacturing (OBM).

Another positive point is that Supermax has raised its dividend policy by raising the payout ratio from 20% to 30% in 2012. Based on this guidance and our revised 2013 and 2014 net dividend per share at the current market price, this translates to 3.3% and 3.7% in 2013 and 2014 dividend yields.

Puncak Niaga Holdings Bhd

By Affin Investment Bank

Trading Buy (maintain)

Target Price: RM3.20

THE board of Puncak Niaga Holdings (PNH) announced on Bursa Malaysia that they were unable to reach a decision on the Selangor State Government's fourth offer which implicitly values PNH at RM2.40 per share, we estimate.

To recap, Selangor State Government had on Feb 22 made a RM9.65bil offer to take over all four water concessionaires in the state.

The board cited incomplete and inconclusive nature of the offer. As such, no extraordinary general meeting has been called to present the state government's offer to PNH's shareholders for consideration. That said, the group also mentioned that they are willing to hold discussions with the state government vide Kumpulan Darul Ehsan Berhad (KDEB) on the offer.

In essence, we view the above development positively. It appears that PNH remains willing to hold further discussions with the state government to resolve the Selangor water restructuring stalemate.

We believe PNH is now attempting to iron out the terms and condition offered by KDEB so as to ascertain that the floor price of RM2.40 per share (equity value) potentially accrued to PNH will not be subject to further liabilities or devaluation.

Selangor Mentri Besar Tan Sri Khalid had noted that an announcement of the state of the offer will be made in two week's time.

And whilst KDEB has not announced an extension we believe that a timeline extension is a probable outcome from hereon. We see this as a positive factor for further share price performance.

Since the fourth offer was announced, PNH's share price has risen by 8% and in the three years since the attempt by Selangor Government to consolidate the Selangor water concessionaires, this current offer appears to be reasonable and importantly, a price tag' that we opine PNH may consider.

A key swing factor now lies in the one Golden Share and at the end of the day, it must be in line with (Pengurusan Aset Air Bhd (PAAB)'s interest to consolidate the water assets in peninsular Malaysia.

We maintain a “trading buy” call with a RM3.20 per share target price on PNH. The sum-of-the-parts-based valuation is derived by staking a value of RM0.84 per share for PNH's oil and gas business to the implied RM2.40 per share price tag for the group's water assets.

We continue to believe that the stock is deeply undervalued and as we see the Selangor water stalemate potentially arriving at a probably close, this under-owned stock may once again draw interest as its water assets can now be monetised creating a support price of RM2.40 per share for the stock.


By Affin Investment Bank

Add (maintained)

Target: RM1.22

GABUNGA AQRS announced that its wholly-owned subsidiary Sinajasa Sdn Bhd has entered into a sale and purchase agreement (SPA) with Sabah Economic Development Corporation (SEDCO) for the acquisition of a 49% stake in Associated Concrete Products (Sabah) Sdn Bhd (ACPS) for RM3.5mil.

The principal business of ACPS is in manufacturing and supplying of precast concrete products.

This is not a surprise development as the group had expressed plans to expand its role in the construction sector in Sabah and Sarawak. We understand that this Industrialised Building System (IBS) business would contribute positively to the group's earnings from financial year 2013. However, the contribution from this segment would be marginal, estimated at around RM1mil to RM2mil to financial year 2013's profit after tax (PAT).

As the estimated contribution from the proposed acquisition accounts for only 3% to 4% of our financial year 2013 net profit forecast of RM54.4mil, we maintain our price target of RM1.22 based on a target 2013 price earnings of eight times. Sunway Bhd

By RHB Research

Buy (maintained)

Target price: RM3.25

OUR top pick, Sunway, remains undervalued despite the recent re-rating.

We reiterate our “buy” call. We recently met management to discuss specifically the Sunway Iskandar project, and we had the privilege to have a glimpse of the tentative masterplan. Based on its track record at Bandar Sunway, we believe Sunway has the capability to repeat the success on its 1,770-acre land at Medini/Pendas.

While the market could be concerned with the impact of rising election risk on GLC-linked property companies, Sunway is an attractive entrepreneurial-driven Iskandar play. Compared to UEM Land Bhd, which is currently trading at 22 times price to earnings, Sunway is only at 9 times. We believe, regardless of the outcome of the election, the Iskandar developments will still take off and the various cross-border agreements will be executed as they involve the Singapore government bodies and corporates. In a worst case scenario, we only foresee potential delays.

In our view, the amount of time to transform Sunway Iskandar into a proper township will be shorter, compared to 15-20 years taken for Bandar Sunway in KL, as basic infrastructure has already been put in place, and Singaporeans and corporates are already looking to relocate due to the price disparity and proximity.

First phase will be located at Medini, facing the upcoming launch of the terrace units by Eastern & Oriental Bhd.

The products that will be rolled out by Sunway are different. It is an integrated development worth a gross development value of RM350mil to RM400mil. We expect demand to be strong. We maintain our fair value of RM3.25, at 30% discount to revalued net asset value. Stripping off the equity value of Sunway REIT, Sunway's property development, construction and trading divisions are valued at only 5.5 times. This is simply unwarranted, given the size, prospects and land bank of the company. Maintain “buy”.

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