1H13 EPS rose by 17.1% yoy on the back of a 35.4% yoy increase in revenue as Supermax benefited from additional capacity, more efficient refurbished lines and a better product mix. At 50% of our and consensus full-year estimates, 1H13 earnings are within expectations.
We maintain our earnings estimates but raise our target price as we now apply a CY14 P/E of 13x, based on a 30% discount (prev. 40%) to Hartalega’s target P/E. The higher contribution from nitrile and surgical gloves following its expansion will widen its margin and narrow the margin gap with Hartalega. Supermax remains an Outperform as its current FY13 P/E of 10x is not reflective of its fundamentals.
Strong 1H yoy growth
1H revenue rose by 35.4% yoy, fuelled by stronger volume arising from the increase in the capacity of its Klang factory from 1.12bn to 1.43bn gloves. The factory’s production lines have been refurbished and started operating early this year. Instead of producing natural rubber gloves, the plant caters solely to nitrile gloves. This, together with higher efficiency from the new lines and a yoy drop in raw material prices, has helped Supermax to nudge up its EBITDA margin by 0.3% pts to 11.3%, resulting in an 17% increase in net profit.
Good qoq growth too
While yoy growth was spectacular, sequential growth was less so, at 3% for 2Q’s topline and 12% for net profit. The higher revenue came mainly from higher average selling price as Supermax sold more powder-free natural rubber gloves. Another contributor to the higher revenue was the gradual start-up of new lines for the production of surgical gloves.
In expansion mode
Five out of the seven new lines dedicated to the production of surgical gloves have been commissioned since May 2012. Its two new nitrile plants in Meru, Klang will be completed within the next two quarters. Supermax has also replaced its old lines with new lines to increase production efficiency.
Expanding surgical glove capacity
The surgical glove capacity expansion at the Sungai Buloh plant is progressing well. Five of the seven lines planned have been commissioned since May 2012. The remaining two lines will be commissioned in stages when the additional automatic packaging machineries are in place.
Tapping the huge demand for nitrile
Supermax is also moving ahead with the production of more nitrile gloves to tap into the huge demand. It has refurbished the older plants by replacing the old lines with newer lines to increase efficiency. All of these new lines are dedicated to the production of nitrile gloves. These new lines started operating early this year and contributed positively to the 1H results. Supermax is also expected to complete the construction of its two plants in Meru, Klang within the next two quarters. On completion, the plants will increase the group’s nitrile capacity by 6.9bn pieces to 12.3bn pieces per annum.
Higher nitrile and surgical sales to boost margins
Supermax ramped up its nitrile production capacity within a short period. Since the last analyst briefing in March when it said that it aimed to increase the production of nitrile from about 35% of total output to 50% over the next few years, its nitrile capacity has increased by 4% to 39% of the total production capacity currently. The company’s prompt response to the changing market demand enables it to ride on the growing demand for nitrile gloves. Aside from that, it is also boosting its surgical glove production capacity. This, together with the higher contribution from nitrile gloves and increased efficiency from the new production lines, will help to increase its margins and narrow its margin gap with Hartalega’s. In view of this, we think that Supermax should trade at a smaller discount to Hartalega. We now apply a CY14 P/E of 13x to Supermax, which is at a smaller discount of 30% to Hartalega’s target P/E than our earlier discount of 40%. This increases our target price. Supermax is trading at an attractive forward P/E of 10x, a 37% discount to the sector’s average which we think is not reflective of the company’s fundamentals.
Publish date: 30/08/13