SUPERMX (7106) - A Hidden Gem under Deep Sea - When will Supermx become Superman?

SUPERMX (7106) - A Hidden Gem under Deep Sea - When will Supermx become Superman?

A foreword
Supermax is one of the top four largest gloves manufacturers in Malaysia. It was extablished in 1987 and have been engaging in own-brand manufacturing of quality medical gloves. Latex gloves have been one of its core products. The company adopts vertical approach to manufacture, market and distribute its products to over 155 counties in the world, most notably, the US, European Union, Brazil and other countries.  Being one of the export-oriented counter listed at Bursa Malaysia, it has become more eye-catching owing to strengthening US Dollar vis-a-vis the currencies of the rest of the world.  

Recap and Review of the Past 3 Years Results
The financial results are shown as follows:

2016-06-30	1,544,786	153,392	9.93	22.55	9.53	8.00	3.72	1.5200	14.84
2014-12-31	1,007,505	101,235	10.01	14.88	11.29	5.00	2.98	1.4400	10.33
2013-12-31	1,048,151	119,716	11.35	17.60	15.74	5.00	1.81	1.3200	13.33

Overall, it is not unreasonable, based on the results, to say that Supermax has "trapped" at its maximal capacity to grow its revenue and profit, suppose there is no further reinvestment in production plants and upgrading equipments. It requires some technical accounting knowledge when you look into the FY2016 financial results. FY 2016 is unique as the company changed its period of a financial year. Previously, its financial year would end on 31 December. Now, the last day of financial year was revised to 30 June. Therefore, the financial results of FY2016 incorporated FY2015 sales and profits which were not technically booked under FY2015.

2016-06-30	2015-12-31	290,737	46,263	38,285	38,820	5.71	2.00	1.5200
2016-06-30	2015-09-30	309,868	48,327	38,344	38,455	5.65	0.00	1.5500
2016-06-30	2015-06-30	229,382	29,538	24,956	24,743	3.64	2.00	1.4400
2016-06-30	2015-03-31	223,208	28,227	24,759	24,947	3.67	0.00	1.4300

Referring to the above details, on annualized basis, the so-called "FY2015" recorded revenue of RM 1,053,195,000  and net profit of RM126,430,000 which improved 4.53% and 24.88% respectively comparing to FY2014 thanks to strengthening USD.   [Check https://www.bloomberg.com/quote/USDMYR:CUR ]

2016-06-30	2016-06-30	266,539	34,783	6,859	6,787	1.00	2.00	1.5200
2016-06-30	2016-03-31	225,002	33,484	20,270	19,670	2.89	2.00	1.5500

Referring to the above figures, FY2016 in fact only consisted of two quarters based on the old accounting FY cut off period. On YoY basis, the revenues of periods ended on 31 Mac and 30 June were growing at  0.8% and and 16.20% respectively thanks to (1) 10.4% rise of sales from overseas distributors; (2) re-commissioning of upgrading production lines 10 and 11; (3) HIgher Average Selling Price improved 7.5% as a result of higher material cost. Meanwhile, the net profits dropped 18.13% and 72.51% owing to higher effective tax rate. As mentioned in Kenanga 's Report,

"This brings 6Q16 pre-tax profit to RM34.5m (+4% QoQ). However, PATAMI came in at RM6.8m (-66% QoQ) no thanks to a higher effective tax rate of 80% due to additional tax paid in respect of previous years’ assessments and provision for deferred tax." [http://klse.i3investor.com/blogs/kenangaresearch/103304.jsp ].
Nevertheless, the tay payment incurred is of one-off nature.

Interesting Questions

(1) Is the business still growing? 
Yes.  The re-commissioning of upgrading production plants 10 and 11 in Klang will catalyze the efficiency gain.  According to Kenanga's research,

"These two plants are expected to ramp up capacity by 32% to 23.2b pieces by 3QCY16, catering entirely to producing nitrile gloves, and have started commissioning and are presently running 8 double former lines equivalent to 2.2b pieces (installed capacity rose 12% to 19.8b pieces as at 31 Dec 2015). The remaining balance of 3.4b pieces capacity is expected to be commercially ready over the next six to twelve months."

A simple calculation: 
Suppose 60% of the additional 5.6 Billion production capacity (per annum) which is 3.36 billion would be sold and recorded in the year revenue (based on my rule of thumb in inventory control), this translates additional of 840 million of gloves would be sold in FY2017Q1, ceteris paribus. Suppose the average selling price is USD 0.10-0.20 /piece (equivalent to MYR 0.41-0.82, check from https://www.alibaba.com/showroom/surgical-gloves-prices.html), given that the average exchange rate is MYR 4.10/ 1.00 USD,the additional quarterly profit increase will record RM 344 million - 688 million. Referring to FY2016 net profit margin of 9.50%, the expected net profit increase will register RM 32,680,000 - 65,436,000.

In summary, REGARDLESS OF THE ACCURACY OF ASSUMPTION OF PRICES AND PERCENTAGE FIGURES SHOWN ABOVE, THE EARNINGS OF THE COMPANY IN THIS QUARTER IS CERTAINLY IMPROVING.

  (2) What can make SUPERMX's growth more sustainable in near future?
The company proposes to carry out Gloves City Project in Bukit Kapar, Klang. According to MIDF's research,
"The total combined capacity of the Glove City with plant 10 and 11 in 2020 is expected to be about 50.4 billion pieces."

Can you not say the earnings prospect is positive given the on-going expansion plan?
The stock price has dropped from its 52-week peak  RM 3.56 from its existing RM 2.28, representing a decline if 35.90% due to:
(a) Sudden spike-up of taxes (which is an one off payment)
(b) Slight strengthening MYR against USD within the period of previous few quarters
(c)  Cost of nitrile latex increases by 7.00%++ (however, it is accompanied by increased average selling price)

Recently, changes in factors (a) and (b) seems favor this counter. Factor (c) does not post a threat to the company as the price has been adjusted upward to absord the higher cost of materials.  Therefore, the sales revenue and profit for FY2017Q1 must be impressive. It is an "Outperform" call.
Disclaimer

This wirte-up is just a piece of thought. Trade at your own risk. 

SUPERMX (7106) - A Hidden Gem under Deep Sea - When will Supermx become Superman?
http://klse.i3investor.com/blogs/sjsoonwriteup/108906.jsp