The 9MFY09 results far exceeded estimates, mainly boosted by persistently strong demand from the Latin American markets, especially Brazil, an increase in selling prices of gloves, production efficiency and better cost management. We have upgraded our FY09-10 earnings by 22%-30% in line with the company’s solid performance and strong rubber glove demand, against a backdrop of minimal capacity expansion by rubber glove manufacturers this year. Maintain Buy with an upgraded target price of RM4.68 from RM3.85 previously.
Trouncing estimates. Supermax’s 9MFY09 results were way above consensus and our expectations, with its 9-month cumulative net profit making up 99% and 95% of consensus and our FY09 forecasts. As we stated in our 14 Oct preview of Supermax’s 9MFY09 results, the company’s 3QFY09 performance shared some similarities with Top Glove’s in that both companies have a similar product mix and target almost the same markets, and posted better-than-expected results due to:
Trouncing estimates. Supermax’s 9MFY09 results were way above consensus and our expectations, with its 9-month cumulative net profit making up 99% and 95% of consensus and our FY09 forecasts. As we stated in our 14 Oct preview of Supermax’s 9MFY09 results, the company’s 3QFY09 performance shared some similarities with Top Glove’s in that both companies have a similar product mix and target almost the same markets, and posted better-than-expected results due to:
1) strong demand from its Latin American markets, especially Brazil, which boosted Supermax’s manufacturing and distribution income,
2) an increase of about US$2.00/1,000 pieces in the selling prices of gloves on tight supply due to the Government’s requirement on the stocking up of gloves
to combat the H1N1 pandemic;
3) production efficiency;
4) better cost management, and
5) a jump in utilization rate from 70% to 90%. These factors significantly lifted its 3QFY09 net profit to RM40.1m, or up 55.5% q-o-q, while its YTD net profit soared 90.2% to RM85.6m. EBIT margin also improved by 2.4%-pts q-o-q to 16.6%, and by 6.0%-pts YTD
to 14.0%. FY09-10 earnings bumped up by 22%-30%. Our upgrade is in line with the company’s better-than-expected performance and the stronger-than-expected demand for rubber gloves. Supermax also announced a tax exempt interim dividend of 5%.
Maintain Buy. Our target price for Supermax is also upgraded to RM4.68 (previously
RM3.85) based on the existing PER of 10x FY10 EPS following our FY10 earnings
upgrade. Going into 4QFY09, we believe its results would still be robust, mainly because there has been minimal capacity expansion on the part of glove makers this year even as demand for gloves is anticipated to grow by about 10bn pieces, or 7%, annually.
Risks to our view. These include:
1) an increase in latex price in tandem with the rise in prices of other commodities;
2) industries moving towards nitrile gloves in a big way as technology narrows the difference in production costs vis-à-vis natural rubber gloves; and
3) forex risk.