We believe we have under-estimated the potential impact from higher-than-expected ASP and margins from OBM distribution amidst the current tight supply situation for gloves with buyers aggressively stockpiling critical medical supplies. Hence, we raised our FY20E/FY21E net profit by 8%/34%, to account for higher ASPs and utilisation. TP is raised from RM4.50 to RM6.00 based on unchanged 26x CY21E EPS. Reiterate OP.

Abnormal demand leading to acute shortage and higher-thanexpected ASP. We believe we have under-estimated the potential impact from higher-than-expected ASP and margins from OBM distribution at a time when supply is tight due to aggressive stockpiling of critical medical supplies of which gloves is one. The lead time has widened further from 90 days to 150-200 days indicating that demand is far outstripping supply at least over the medium-term. We highlight that Supermax’s potentially higher margins, achieved via distribution from its Own Brand Manufacturing (OBM), is greatly under-appreciated. The potentially higher margin for Supermax’s stems from its associates’ (in Brazil, Australia, Europe and Canada) distribution channels and marketing under its own brands (such as Aurelia and Maxter)., However, we are more bullish on higher ASPs in 2H 2020 due to the present tight situation of buyers jockeying for position to secure allocation.

Outlook. Plant 12 consists of Block A and Block B, each consisting of 8 double former lines with 2.2b pieces each (total 4.4b pieces). As of now, for Block A, its remaining 3 lines started commissioning in end March 2020 on top of the 5 lines already in commercial production. For Block B, all 8 lines are expected to be fully commissioned by 2H 2020. Upon full commercial production by 2H 2020, installed capacity will rise 13.4% to 26.2b pieces per annum.

Raised FY20E/FY211E net profit by 8%/34% after raising utilisation rate from 80%/93% to 85%/97%. We raise our ASP from USD23/1,000 to USD23.80/1,000 in FY20 and from USD23/1,000 to USD32/1,000 pieces in FY21.

Undemanding PER valuation of 21x compared to 80% earnings growth. Correspondingly, our TP is raised from RM4.50 to RM6.00 based on unchanged 26x CY21 revised EPS of 23.0 sen (at slightly above +2.0 SD above 5-year historical forward mean). We like Supermax because the stock is trading at an undemanding 20x FY21 EPS compared to earnings growth of 80%. Reiterate Outperform.

Key risk to our call is longer-than-expected commercial operations of new plants.

Source: Kenanga Research - 19 May 2020