Company Name: SUPERMAX CORPORATION BHD
|Research House: CIMB||Price Call: BUY||Target Price: 4.38|
(Oct 27, RM3.56)
Maintain outperform with target price of RM4.38: A strengthening distribution platform will ensure that the world's second largest glovemaker emerges unscathed from the next one to three years of overcapacity. In addition, We gather that a bonus issue may be in the works.
Supermax's results briefing left us feeling more positive about its prospects as it is beefing up its distribution platform. We maintain our 'outperform' call and target a forward price-earnings ratio (PER) of 9.8 times. The stock would be catalysed by better earnings from easing costs and widening margins.
During the briefing, Supermax talked about initiatives that will take the company through the next one to three years of overcapacity. These include enhancing its distribution in Germany and North America while cautiously expanding into China. Supermax said it has exceeded internal sales targets in Germany and has qualified as a preferred supplier for some multinational companies. In the US, Supermax is purchasing warehouses as it expands into the US hospital market in 2012. Also in 2012, Supermax intends to start its distribution network in China.
Supermax indicated that the demand for nitrile gloves is declining due to the narrowing cost of production between nitrile and natural rubber. Even so, it is prepared to sell both types of gloves as 70% of its production lines are interchangeable. Without elaborating, it also said that it intends to make an announcement on an exercise to enhance shareholder value in the next few months.
Despite Supermax's comments that demand for nitrile gloves is on the wane, we believe that demand for nitrile remains strong. Our analysis suggests that the cost of producing nitrile gloves is 20% lower than natural rubber gloves, which we believe will incentivise distributors and hospitals to use nitrile gloves.
We gather that Supermax's announcement may be a bonus issue. While this is a positive surprise, for a company as liquid as Supermax the impact of the exercise will be less.
Investors should accumulate Supermax shares. At just 8.7 times FY12 PER, the stock trades at half the valuation of Top Glove Bhd, making it a cheaper play on the sector where earnings have bottomed out on the back of more stable rubber prices. ' CIMB IB Research, Oct 27
This article appeared in The Edge Financial Daily, October 28, 2011.