1H18 net profit of RM63.8m (+51.5% YoY) came in above expectations at 66%/62% of our/consensus full-year net profit forecasts. The variance from our result was due to higher-than-expected volume sales. As such, we raised our FY18E/FY19E earnings forecast by 14.4%/18.5% to take into account higher volume sales. TP is raised from RM1.70 to RM1.95 based on unchanged 12x FY18E revised EPS. Reiterate UNDERPERFORM.

1H18 above expectations. 1H18 net profit of RM63.8m (+51.5% YoY) came in above expectations at 65%/66% of our/consensus full-year net profit forecasts. The variance from our result was due to higher-than- expected volume sales. A first interim DPS of 3.0 sen/share was declared, which is within our expectation.

Key Result Highlights. QoQ, 2Q18 revenue rose 7.7% to RM335.9m due to higher volume sales but this was more than offset by lower ASPs. There was no guidance in terms of actual volume sales and ASPs growth in their results commentary. 2Q18 PBT rose 41.8% as PBT margin expanded by 4.2pp to 17.2% due to lower input raw material prices and efficiencies gain from efforts taken to improve efficiency and productivity. However, due to a higher effective tax rate of 35.3% compared to 30.9% in 1Q18, 2Q18 PATAMI rose 28.7% to RM35.9m. This quarter marked the second successive quarterly earnings beating consensus.

YoY, 1H18 PATAMI of RM63.8m (+51.5% YoY) was due to stronger revenue (+28.1%) underpinned by higher output achieved from refurbishment work, higher demand and better operational efficiencies. Profitability has improved on efforts taken to improve efficiency and productivity, including the refurbishment of the older lines and streamlining of work processes. As a result, 1H18 PBT margin was higher by 4.6pp to 15.2% from 10.6% in 1H17.

Outlook. There was no guidance in terms of new capacity expansion, volume sales and ASPs in the results commentary and details were also scant in terms of outlook. Looking ahead, the fast appreciating MYR against the US Dollar is a bane to Supermax as it does not hedge its US dollar receipts. In terms of outlook for gloves, the Chinese government’s concerted efforts to clamp down on highly polluting nature of vinyl glove plants that had aggravated China’s polluted environment has proven to be a boon for the natural rubber and nitrile glove producers as demand has shifted to them.

Upgrade FY18E/FY19E net profit by 14.4%/18.5%. We upgrade our FY18E/FY19E net profit by 14.4%/18.5% to take into account higher volume sales.

Reiterate UNDERPERFORM. Correspondingly, TP is raised from RM1.70 to RM1.95 based on unchanged 12x FY18E revised EPS (at +0.5 SD above its historical forward average). Following the recent share price run-up coupled with poor visibility in terms of forward looking guidance, we keep our UNDERPERFORM rating.

Key risks to our call. Higher-than-expected volume sales and lower- than-expected tax rate.

Source: Kenanga Research - 15 Feb 2018