1HFY21 PATAMI of RM1,849m (+33-fold YoY) came in above expectations at 59%/56% of our/consensus full-year forecasts. The variance to our estimate is due to higher-than-expected ASP. We upgrade FY21E/FY22E net profit by 27%/16%. The group highlighted that i) ASP in 2QFY21 is not the highest yet and; ii) although the group is presently in an oversold position, it believes that glove demand will moderate following the roll-out of the Covid- 19 vaccines albeit gradually rather than dropping sharply due to the structural change in consumption from new customers. Due to the diminishing ASP visibility and execution risk in its overseas venture, we downgrade our TP to RM7.80 based on 12x CY22E EPS of 65.0 sen as we roll over our valuation base from CY21 to CY22. Reiterate OP.

Key results’ highlights. QoQ, 2QFY21 revenue rose 48%, largely due to higher ASP and volume sales boosted by full-quarter contribution from Plant 12, while 2QFY21 EBITDA rose 33%. However, EBITDA margin fell 8%pts to 71% from 79% which we can only guess could be due to a combination of high input raw material nitrile cost, one-time donation to the Government and workers remediation fee. Note that other cost and expenses in 2QFY21 rose by an additional RM270m QoQ. 2QFY21 PATAMI rose 34% to RM1,060m. A 1st interim DPS of 3.8 sen was proposed which came in line with our expectation. YoY, 1HFY21 PATAMI rose 33-fold to RM1,849m due to revenue growth (+343%) boosted by higher ASP.

Key points to highlight in 2QFY21 results note. In the quarterly results note, the group highlight that ASP in 2QFY21 is not the highest yet. However, it believes that glove demand and consumption will moderate following the roll-out of the Covid-19 vaccines albeit gradually rather than dropping sharply due to the structural change in consumption from new customers coupled with greatly heightened healthcare and hygiene awareness. Looking forward, we are concerned about execution risk in its overseas venture. To recap, Supermax is venturing into the United States of America (USA) to manufacture medical gloves and other personal protective equipment (PPE) with an initial capital outlay of USD100m (RM405m). The capex earmarked for this venture is USD300m for Phase 1 and USD250m for Phase 2. Plant 18 in USA would kick start in 1H 2021 and targeted to commission in stages starting 1H 2022. The group have shortlisted several suitable manufacturing sites for this Plant 18 in the US and is currently working with state and local county there for various infrastructural support. As for Plant 19 in the United Kingdom, the group is presently studying the suitability of the manufacturing site. Plant 12 comprises Block A and Block B (total 4.4b pieces) have been completed following the commissioning of Block B of in 2QFY21, adding 2.2b pieces bringing installed capacity to 26.2b (+13.4%). It is concurrently building five glove manufacturing plants scheduled for completion progressively between now and 2022 which will add 22.3b new capacity and raising total capacity to 48b by end-2022.

Raised FY21E/FY22E net profit by 27%/16% after hiking our ASP from USD65/1,000 and USD45/1,000 pieces to USD70/1,000 pieces and USD50/1000 pieces, respectively.

Reiterate OP. Due to lack of ASP visibility and overseas execution risk of the US venture, we downgrade our TP from RM9.05 to RM7.80 based on 12x CY22E EPS (5-year forward historical mean) as we roll over our valuation base from CY21 to CY22. We like Supermax for its OBM model which enables it to extract higher margin from distributor prices, compared to the OEM model at lower factory prices.

Key risks to our call include: (i) lower ASP occurring sooner than expected since it is unlikely to be sustainable over the long run, and (ii) faster-than- expected vaccine roll-outs.

Source: Kenanga Research - 2 Feb 2021