Negative surprise from Supermax, CIMB Research downgrades to Hold

KUALA LUMPUR: CIMB Equities Research has downgraded glove maker SUPERMAX CORPORATION BHD from Add to Hold following the negative surprise about the conviction of managing director Datuk Seri Stanley Thai for insider trading.

The research house said it had lowered the 12-month target price from RM2.46 to RM2.03 which is 12 times CY19 price-to-earnings. Its last traded price was RM2.09.

“Although we still are of the view that the company’s prospects are improving while it should deliver strong earnings ahead, this negative surprise will weigh down on Supermax’s share price and create a share price overhang in the medium term. 

“Downside risk: significant loss of orders due to reputational impact; upside risk: successful appeal of the conviction,” it said.

On Friday, the Securities Commission announced that Thai was found guilty of insider trading by the Kuala Lumpur Sessions Court. This was with regard to communication of non-public information between Oct 25 and 29, 2007 about APL Industries Bhd (APLI). 

He was sentenced to a five-year jail term and fined RM5mil; this is the first time a custodial sentence for insider trading has been handed out.

At this juncture, a stay of execution has been granted while a filing of appeal is accepted. 

CIMB Research said this scenario was not inputted in its expectations. Although the insider trading charges are not related to Supermax directly, it pointed out Thai is a key management personnel as executive director and group managing director. 

“However, we believe the stock has largely priced in this issue as Supermax has traded at an average discount of 21.1% to its peers since he was charged in court with this offence on Dec 15, 2014. 
“Supermax has, so far, not announced any potential changes to its management team post the conviction. Nevertheless, Supermax has said that it is confident the remaining members of its management team are more than capable to oversee the group’s global operations with no major changes. 

“We gather that members of the group’s management team are all well experienced in Supermax’s business and most of them have been with the company for more than 20 years.  

“Although we are of the view that Supermax’s business operations should remain unscathed, we have concerns regarding reputational risks on the stock. 

“We believe that investors will be apprehensive in investing in Supermax at this juncture with the current negative newsflow. However, we do not expect a massive de-rating on the stock as its CY18 P/E is currently already trading at a 44% discount to the sector’s average of 24.2 times. Still, we widen the discount to 50% (from 40%) to the Malaysia glove sector’s average to reflect these risks,” it said.  

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