Supermax Corp Bhd
(Jan 19, RM1.86)
Upgrade to buy with a higher target price (TP) of RM2.30 from RM2.20: Supermax Corp’s share price has fallen by 34% since January 2014. Notable drops occurred from Feb 20, 2014 to July 1, 2014 (a decline of 32% due to delays in the commissioning of Plants 10 and 11 in Meru, Klang), and on Dec 15, 2014 a decline of 17% when its chief executive officer [CEO] was charged with insider trading of APL Industries Bhd.

Plants 10 and 11 are widely expected to start commercial production in the first quarter of 2015 (1Q15). The management has yet to confirm this, but conversations with industry sources suggest that these two plants have indeed started operations. If proven true, this would serve as an important rerating catalyst for the stock, as it puts the company’s expansion plan back on track after repeated delays.

We revised our foreign exchange assumptions to RM3.27, RM3.41, RM3.41 per US dollar for the financial year 2014 (FY14), FY15 and FY16 respectively to bring it in line with DBS Vickers Securities’ (DBSV) internal forecasts.

In doing so, we lowered our average selling price (ASP) assumptions, as Supermax will likely pass on some of the benefits from the stronger US dollar to its customers. Also, we pushed back the expected date of commercial production for Plants 10 and 11 to 1Q15 from 4Q14, resulting in a 2% drop in FY14 sales volume. These adjustments led us to revise our FY14, FY15, FY16 earnings by an increase of 3% in FY14 and an increase of 6% in both FY15 and FY16.

We upgrade Supermax to a “buy” with a revised TP of RM2.30, based on 11 times FY15 earnings per share (EPS). We think its current share price presents an attractive entry point (that is nine times FY15 EPS which is a 45% discount to industry average), due to sharp decline since January 2014.

Concerns over its CEO’s insider trading case seem to be overdone as it is unlikely to affect the fundamentals of the company. — Alliance DBS Research Sdn Bhd, Jan 19

This article first appeared in The Edge Financial Daily, on January 20, 2015.