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Barring insider information, analyzing a buyout gleaned strictly from public information is extremely difficult to call correctly. I have made four such calls (including Supermax). The first was Unisem, which I was partially correct. A Chinese company bought 51% of Unisem without taking it private. China was on a mission to achieve self-sufficiency in its semiconductor industry. Money was not an issue. China was willing to spend whatever amount to acquire its stated goal. That news caught my attention. Unisem was well connected in China and had well-established manufacturing there. It appeared a natural fit for the Chinese to acquire it.

The second was moot due to the toxic political climate prevailing at that time. Given the ongoing political mood, I don't expect it to happen any time soon.

The third one, I believe, will eventually take place. It's a matter of time. But time is always of the essence.

This brings us to the fourth, Supermax.

We are well aware that the U.S. was caught with its pants down in this pandemic. It could not ensure sufficient supplies of disposable gloves to combat the pandemic. The U.S. vows not to repeat this mistake. It wants to have absolute control over the strategic supplies of PPE. This strategic goal is quite comparable to China striving to be self-sufficient in semiconductors. However, the U.S. ambition to be self-sufficient in PPE alone is not a sufficient ground to infer that Supermax might be a takeover target. The seemingly unrelated events that follow might give us some clues to make this conjecture.

• Remember, Operation Warp Speed? The U.S. government had literally poured money into vaccine research to fix the runaway disaster caused by its mismanagement of the Covid-19 pandemic. With unlimited funding from the U.S. government, the pharmaceutical companies succeeded in producing vaccines from inception to injection within a matter of months rather than years. Such a model to achieve the nation’s strategic needs is a well-worn path in defense, space, and now healthcare. Private businesses could use this model to negotiate with the U.S. government to ensure lucrative pricing on strategic needs before plunging into production with guaranteed profits. Taking note of this procurement strategy is an important step to help connect the dots, which I shall explain later.
• Supermax bought back a total of 14.1 million shares at an average price of Rm7.83 from Sep 10 to 29. It had stopped buying back since, despite the price falling to the low of Rm5.38 on Jan 4, 2021. On the contrary, Tan Sri Lim has been feverishly buying back Top Glove shares. Strange?
• On Dec 3, both Dato’ Seri Thai and Puan Seri Tan Bee Geok transferred all their 982.7 million shares into Supermax Holdings Sdn Bhd. Why now?
• On Dec 11, JP Morgan reinstated coverage of glove counters with garbage, damning report, totally devoid of the usual stock analyst methodology, that caused a gap-down in glove counters. It forecasted the fair value of Top Glove at Rm3.50, Hartalega, Rm 8.50, and Kossan, Rm Rm3.80. Strangely, Supermax was conveniently left out of the coverage. Why?
• So, out of the blue, JP Morgan decided to reinstate its research coverage of glove companies, which, they claimed, are dud. Those who had worked for the stockbroking firms know that their research departments would not waste time to initiate coverage on failing companies. They would only commence coverage of companies with growth prospects so that their clients would be interested to trade in those stocks. In fact, they would soon stop covering stocks that are failing. And here, we have the world-renowned con-artist deciding to reinstate its coverage of glove companies that they claimed are failing! It just doesn't square. ( List of frauds committed by JP Morgan )
• On Dec 21, Supermax announced that it would invest US$550 million to manufacture medical gloves in Delaware. There was nothing unusual about this announcement as Supermax had been actively building its organization in Western countries to expand its business. It was a strategic investment. Or so it seemed?

To summarize, here are the pieces we have on the chessboard:

1. The U.S. government wants to be self-sufficient in PPE.
2. The Thai Family transferred all their shares into a Sendirian Berhad company.
3. Supermax stopped buying back its shares.
4. JP Morgan used their megaphone to drive down the glove counters without mentioning Supermax in their reports.
5. Supermax planned to manufacture in Delaware.

WARNING: Before we put the pieces together, let’s be clear. I have no inside information. It’s about analyzing from available public information and employing investor instinct. I may be right. I may be wrong. But, insider trading is obviously illegal. To make inferences based on public information are not. So far, everyone appears to operate above board, even JP Morgan, howsoever we might disagree with its practice. Their reports represented their opinions. I don’t believe there is any deal signed between the parties. No one is obligated to announce matters that are still under discussion. 

Let’s imagine a movie plot if you were to take on Uncle Sam’s call to make America self-sufficient in PPE. Here’s what I think a rational businessperson would do.

1. First, they would work out their plan, which includes how they would go about securing PPE supplies. Let’s say, they had identified Supermax as the perfect size glove company to acquire.
2. With a plan in hand, they would negotiate with Uncle Sam for a commitment on the price of gloves roughly based on the current market, exactly like how the vaccine players did.
3. They would need to contact the key players at Supermax and make sure that they are receptive to the idea without signing anything. There would be nothing to announce since all parties were only exploring and considering the possibility.
4. Now, as a good businessperson, they would want to pay as little as possible. But they would have to pay an attractive price to unlock the 38.25% owned by the Thai Family. Excluding the Thai Family's stake, there would be 1.62 billion shares held by other investors for them to mop up. Supermax shareholding is among the most fragmented. Based on the last annual report, the next largest shareholder after the Thai Family held only 1.59%.
5. To mop up as many shares cheaply might not be easy. The Bursa rules require an investor to disclose as substantial shareholder when their ownership reaches 5%. To overcome the 5% huddle, they would have to rope in a consortium of investors. Roping in more investors is also a good investment practice to spread out the risk. With 10 members on board, mathematically the consortium could buy up to 1.31 billion shares in the open market without triggering the substantial shareholder rule. Should the consortium manage to buy this number of shares at an average price of Rm9.50, it would only cost them Rm12.4 billion. After this, the investors would have to surface as substantial shareholders. By this time, the free float in the market would be very tight. The price would have shot up to at least Rm13. They might be able to mop up a further 150 million shares at an average price of, say, Rm15. By the time they announced the takeover, the price would be fairly close to what the Thai Family would be willing to sell. (I imagine anyway between Rm20-25 would be attractive, if I were the Thai Family.) So, let's assume that the last 1.198 billion shares cost the consortium Rm23. The total cost paid to take it private would work out to about Rm42 billion. After deducting cash on hand in Supermax, the actual cost would be under Rm40 billion, which is less than US$10 billion. With guaranteed pricing from Uncle Sam, the payback period might be less than 10 years. What an excellent investment.

The consortium would buy over Supermax Holding Sdn Bhd to complete the transaction. It would be a lot cleaner. I doubt the consortium would want to keep the listing. Why would they want to share the profits with us and subject to Bursa rulings? It just doesn’t make sense.

Now JP Morgan could walk away clean with nothing whatsoever to do with Supermax transaction. It did not even mention Supermax in its research coverage. But all stock players know if JP Morgan hit Top Glove, Hartalega, and Kossan, Supermax share price would similarly be affected just the same. And it did. Would this be collusion? Nah. It will be hard to prove.

As for the Thai Family, walking away with a cool Rm23 billion after a 33-year hard work, well, can’t really complain, can they?

What about the Supermax Delaware manufacturing facilities? This last piece of the puzzle is what makes Supermax such a Goldilocks takeover target. It is a perfect story to convince Uncle Sam. The strategic PPE will soon be producing onshore in the home state of President Biden! Supermax is a well-established glove manufacturer with a reliable supply chain. It is a perfect fit to provide strategic glove supplies to Uncle Sam. Not too big, not too small. It comes at just the right price.

The end. The fiction movie rolls to a conclusion. Will it come to life like Jumanji? We’ll see.

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On a personal note, I would rather not see this fiction movie come to life. As some of you might recall, I am rooting for Supermax to reach Rm40. It is just not possible, some might argue. I agree. At Rm40, the Supermax market cap would exceed Maybank and Public Bank. But this is the stock market. With exuberance and hyped-up sentiments, anything can happen. Could anyone in their right mind ever imagine that the Tesla market cap would one day be larger than all the U.S. car manufacturers put together? Frankly, I wouldn’t buy Tesla shares at this inflated price. But at Rm40, Supermax shares would be valued at only 25x FY21 forward PE. Not too unreasonable if all the stars align. It’s not going to be an easy route to Rm40. The mRNA vaccine might go wrong, new Covid variants might prove more lethal, and when the disconnect between the stock market and real market returned to equilibrium, stock prices would fall. Investors would then flock to profitable companies like gloves in droves.

Investors might be uncertain about the earnings prospects of glove companies right now. The conventional thinking was that once people received the vaccines, the demands for gloves would collapse. With it, so goes the outsized earnings of glove companies. It would take a few months for the vaccine narrative to settle down. After that, should the demands for gloves continue to keep pace and Supermax earnings look sustainable, a 25x PE would look cheap for a fast-growing company like Supermax.

Let's take a worst-case scenario. Supermax profits crashed to Rm340 million per quarter. That quarterly profit would still add up to a 50 sen EPS. At normalized PE of 20x, Supermax shares would still worth Rm10. By the end of 2022, Supermax production capacity would have doubled.  Even a bear would not value it at less than 15x PE in a normalized market. The stock price could not justifiably get any lower than what it is. So, sit back and relax.

This remains my go-to principle for stock selection:

The stock price is like a dog on a leash. The dog can run up and down, left and right, but eventually, it comes back to the owner who holds the leash. In the stock market, that owner with a leash is the rising streams of earnings.

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