Supermax (SUCB) reported a very strong set of 1HFY18 numbers, with net profit surging 52% yoy to RM63.8m. This was above our (despite having the most aggressive forecast on the street) and consensus forecasts, as it constituted 56% and 62% of the full-year forecasts. We believe the positive earnings surprise will serve as a rerating catalyst for the stock, as its valuation continues to lag behind its peers, which are currently trading at above >25x CY18E PERs. We revise up our EPS forecast by ~15%, with a higher 12-month TP at RM3.50. Maintain BUY.

Margin Expansion Continues Into F2Q

Despite the stronger RM during the quarter, Supermax was still able to deliver margin improvement (+3.1ppts qoq). We believe that this was due to the stronger demand for gloves, which allowed it to price its products at a sustainable margin, coupled with the operating efficiency gains from a higher utilisation rate of its plant. Although production costs are expected to rise in F3Q from the natural gas price hike and the absorption of the foreign workers levy, we are not overly concerned about the impact on margin, as SUCB will be able to pass this on, given current strong demand.

Volume Growth Could Still Continue

Apart from the better margin, the improvement during the quarter was also helped by stronger sales volume both qoq and yoy. Management has mentioned during its recent AGM (November 2017) that the issue surrounding plant 10 and 11 has finally been resolved, and would have been operational by now. As such, we believe that our capacity growth estimate of 7-9% remains intact, and given the current strong demand, SUCB should not face any overcapacity issues, which will help drive earnings growth in subsequent quarters.

Higher TP at RM3.50, Maintain BUY

We have raised our EPS forecasts for FY18-20E by 15%/15%/14% to incorporate the better performance moving forward. We also raise our TP to RM3.50, based on an unchanged 18x PER on our CY18E EPS, at a discount to the long-term industry average of 20x. Given that the previous concern on SUCB was on its ability to deliver sustainable earnings growth due to legal issues surrounding its management, the delivery of the current strong 1HFY18 earnings will likely serve as a re-rating catalyst.

Source: Affin Hwang Research - 15 Feb 2018