April 16, 2010

SUPERMX - Selldown in Supermax unjustified, says CIMB

Stock Name: SUPERMX
Company Name: SUPERMAX CORPORATION BHD
Research House: CIMB

Supermax Corporation Bhd
(April 15, RM6.93)
Maintain buy at RM6.98 with target price of RM9.65
: Supermax is scheduled to release its 1QFY10 results on Monday. Although no new capacity came onstream during the quarter, we estimate that net profit more than doubled year-on-year to around RM50 million, thanks to strong demand.

Given the expected stronger contributions in the coming quarters, we are likely to raise our FY10 to FY12 earnings forecasts by 23% to 25% when the results are announced. For now, we also retain our target price of RM9.65, which is pegged to a 20% discount to Top Glove's target price to earnings (P/E) of 16.5 times.

We think that the recent selldown of Supermax is unjustified given the resilient demand for rubber gloves and glove manufacturers' ability to pass on cost increases, be it latex, energy or even a weaker US dollar. We maintain our buy call on Supermax, premised on the potential re-rating catalysts of the anticipated strong 1Q results, continuing uptick in glove demand and upcoming capacity expansion. Supermax remains one of our top picks for the sector.

Our positive stance remains. Rubber glove stocks have come under selling pressure of late as investors fret about a repeat of the share price collapse in 2008 when investors assumed that record latex prices, high energy prices and a weakening US dollar would dampen glove makers' earnings significantly. We think that the recent selldown of the stocks is unjustified, given the resilient demand for rubber gloves and glove manufacturers' ability to pass on cost increases. Moreover, glove manufacturers proved their resilience against the 2008-2009 global economic turmoil and earnings continued to rise despite the weakening US dollar and high costs during 2008. On average, the total net profit of the companies in our coverage increased 19.5% in FY08 and 65.3% in FY09. We strongly believe that industry prospects remain favourable and Supermax is one of the key beneficiaries.

Given the additional capacity coming in during 2Q, we expect Supermax's core net profit to grow by at least 25% this year. The company's return on equity (ROE) improved to an impressive 27% last year. The company is also strengthening its balance sheet position, with net gearing falling to 31.5% in 2009 from 90% the year before. - CIMB Research, April 15


This article appeared in The Edge Financial Daily, April 16, 2010.

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