Supermx ... Oct11

CIMB Research Report

Investment highlights
• Maintain HOLD. The main takeaway from Supermax’s 2Q11 results briefing yesterday was the company’s commitment to raising its minimum dividend payout from 20% to 30% from FY12 onwards. After incorporating this assumption, we raise our FY13 gross DPS by 12% but lower FY12 by 7% as we had factored in 33% payout for that year. We make no changes to our other numbers or target price of RM3.64, which is based on a forward P/E of 9.8x or a 25% discount to Top Glove’s 13.1x target P/E. Supermax remains a HOLD as it lacks catalysts and its cheap valuations are offset by overcapacity and weak demand for natural rubber (NR) gloves. For exposure to gloves, we recommend Hartalega which has superior
yields, margins and profitability.

• Switching takes a breather. As highlighted in previous notes, the cost differential between nitrile and NR is narrowing. In Apr 2011, the cost of production for nitrile gloves was as much as 40% below their NR equivalents. But this difference has narrowed to c. 5%. Nitrile capacity remains at 33% of Supermax’s total capacity, similar to 1Q11’s level but higher than 2Q10’s 19%. We sense that Supermax has stopped switching NR lines to nitrile but is ready to do so if input prices change.

• Weak demand for NR gloves. Supermax’s overall utilisation in 2Q11 was 71%. But we estimate that the utilisation rate for its NR plants was much lower at around 55- 60%. These numbers assume 90-100% utilisation of the company’s nitrile plants and a 33% nitrile capacity mix.

• Glove City deferred to FY14. Due to gas shortages, Supermax has deferred the construction of its Glove City project to FY13 and expects this project to start contributing to earnings in FY14. This uncertainty clouds the company’s longer-term growth prospects.

Recent developments
Approximately 60 analysts and fund managers turned up for Supermax’s 2Q11 results briefing yesterday. The presentation was chaired by its executive chairman and group MD Dato’ Seri Stanley Thai, who was flanked by ED Datin Seri Cheryl Tan and group accountant, Andrew Lim. We left feeling neutral about Supermax’s prospects. Supermax’s commitment to raising its dividend payout next year is a positive surprise
but is offset by the subdued picture for NR glove demand.

Dividend commitment. Supermax will raise its dividend payout from 20% of net profitto 30% from FY12 onwards. This is slightly below our assumption of a 33% payout in FY12 but higher than our assumption of a 27% dividend payout in FY13. After rebasing Supermax’s dividend payout in FY12 and FY13 to 30%, we reduce our FY12 gross DPS by 7% to 15 sen but raise FY13 by 12% to 18 sen.

Switching momentum slowing. The moderation of NR latex prices and higher nitrile prices have slowed the industry’s switch from NR to nitrile gloves. As a result, Supermax is keeping its nitrile mix at 33% for now although we sense the company isready to switch more of its NR lines to nitrile if the cost difference between nitrile and NR starts to widen again.

Earnings outlook
Glove City on hold. Due to gas shortages, Supermax is deferring the start of its Glove City project to 2H13 when the company expects the gas situation in Malaysia to normalise. It expects the project, which will increase its capacity to 15bn pieces of gloves over 10 years, to start contributing to earnings in FY14. We believe that this uncertainty clouds the company’s longer-term prospects.

Utilisation low due to plant shutdowns. Supermax sold 3.13bn pieces of gloves in 2Q on the back of an overall utilisation rate of 71%. 1H 11 sales volumes were 6.5bn pieces of gloves, implying a utilisation rate of 73%. 2Q utilisation was 6% pts lower qoq and 10% pts lower yoy. We believe the lower utilisation is a result of weak demand for NR gloves and an industry glut.

FY11 guidance confirmed. During the briefing, the company confirmed the RM100m-120m FY11 net profit guidance provided in its 2Q results release. It is confident of meeting the high end of the range as it expects 2H11 to be better. As for FY12earnings, Supermax will make an official announcement after its 4Q11 results release next year.

Recommendation
Maintain HOLD. The main takeaway from Supermax’s 2Q11 results briefing yesterday was the company’s commitment to raising its minimum dividend payout from 20% to 30% from FY12 onwards. After incorporating this assumption, we raise our FY13 gross DPS by 12% but lower FY12 by 7% as we had factored in 33% payout for that year. We make no changes to our other numbers or target price of RM3.64,
which is based on a forward P/E of 9.8x or a 25% discount to Top Glove’s 13.1x target P/E. Supermax remains a HOLD as it lacks catalysts and its cheap valuations are offset by overcapacity and weak demand for natural rubber (NR) gloves.