This article first appeared in The Edge Financial Daily, on April 7, 2016.

Supermax Corp Bhd
(April 6, RM2.75)
Upgrade to buy from neutral with an unchanged target price (TP) of RM3.21: Supermax Corp Bhd is in the midst of commissioning the remaining nitrile glove production lines at plants 10 and 11. Plants 10 and 11 are currently operating 10 double-former lines after further commissioning were halted. 

The remaining capacity to come from plant 11 consists of four double-former lines and six double-former lines to begin commissioning at end-April and June respectively. 

Total capacity would be increased by 5.63 billion pieces to 23.43 billion from 17.8 billion per annum once all double-former lines have been commissioned by the end of June 2016.

On its Glove City project, we understand that infrastructure has been approved and the company is currently waiting for the development order. The project, which has an estimated capital expenditure of about RM930 million, will consist of factories 1, 2, 3 and 4. 

The construction of factory 1 will commence in the second half of 2016 (2H16), and it will have 22 double-former lines with an installed capacity of 7.98 billion pieces per annum.  Commissioning of factory 1 will be initiated in stages from 2H17. 

As for factories 2, 3 and 4, these plants would have a total combined installed capacity of 23.9 billion pieces per annum. The time it takes for construction per factory is between 15 and 18 months upon commissioning of factory 1. 

The total combined capacity of the Glove City with plants 10 and 11 in 2020 is expected to be about 50.4 billion pieces.

Supermax is also in the midst of conducting stability tests on the shelf life of its packaged contact lenses at its Sungai Buloh plant. 

The company targets to secure International Organization for Standardization certifications, allowing registration of the products. 

To expand its contact lens division, 16.3 acres (6.6ha) out of the 100-acre land of the Supermax Business Park in Serendah, Selangor, will be allocated for the contact lens headquarters (four construction phases) with an integrated manufacturing facility, which will take about eight to 10 years to complete.

The company is also looking at developing the remaining land in Serendah, which has an estimated gross development value of about RM535 million by targeting glove-related manufacturing support businesses.

The company is still exploring whether this would be done through selling or leasing out the said plot and infrastructure to prospective businesses, which may create a sustainable value-added business chain for the company going forward.

From financial year 2016 (FY16), the company plans to increase its product mix from 47% nitrile gloves and 53% natural rubber gloves to a ratio of 55:45. We believe that this is possible as the company is on track to add 5.63 billion pieces in nitrile production capacity by June 2016, and it has recently been awarded a licence to supply to the UK National Healthcare Services that covers all hospitals in the United Kingdom.

We think this could also assist in boosting its margin and offset the declining average selling prices (ASPs) of nitrile and rubber gloves, which have decreased by an average of 11.9% quarter-on-quarter (q-o-q) and 5.9% q-o-q respectively in the recent 12 months of FY16.

We are making no changes to our earnings forecasts for FY16 and FY17 as we believe Supermax is on track to meet our earnings projections. 

We are also maintaining our ringgit assumption of RM3.90 per US dollar in view of the strengthening of the ringgit of late. 

Key risks to our earnings would most likely be increasing competition, which may squeeze margins and ASPs, a sudden jump in raw material prices (latex and nitrile) and delay in capacity expansion.

Given the recent selldown in its shares due to the strengthening of the ringgit, we are upgrading our call on Supermax to a “buy” (from “neutral”) with an unchanged TP of RM3.21 per share. 

Our TP is derived by pegging our FY17 forecast (FY17F) earnings per share of 22.9 sen to an unchanged price-earnings ratio (PER) of 14 times, which is its historical average 12-month rolling PER. 

We think that this is justified as the fundamentals of the company are still intact and global demand for rubber gloves is still strong at 8% to 10% per annum going forward. 

Furthermore, the company is now trading at an attractive 11.3 times FY17F PER. — MIDF Amanah Investment Bank, April 6