In a recent meeting with Supermax’s management, CIMB research said Supermax aims to boost its total glove production capacity by 35% to 29.4 billion pieces per year by financial year 2020 forecast (FY20F) via the revamping two existing plants.
In a recent meeting with Supermax’s management, CIMB research said Supermax aims to boost its total glove production capacity by 35% to 29.4 billion pieces per year by financial year 2020 forecast (FY20F) via the revamping two existing plants.
KUALA LUMPUR: Glovemaker Supermax Corp’s earnings growth is expected to be mainly driven by a projected 35% increase in its glove production by the end of financial year 2020, said CIMB Research.
In a recent meeting with Supermax’s management, the research house said the company aims to boost its total glove production capacity by 35% to 29.4 billion pieces per year by financial year 2020 forecast (FY20F) via the revamping two existing plants.
The existing plants are namely Block F and Lot 38 in Perak and Selangor respectively.
Currently, Supermax is also in the midst of constructing one new glove plant, Plant 12 in Klang, with 4.4 billion pieces per year capacity. The plant’s commissioning will be in two phases, Phase 1 (2.2 billion) by third quarter of calendar year 2019 (3QCY19) and Phase 2 (2.2 billion) by 1QCY20.
Given the competition in the glove industry, CIMB Research said that the margin compression in the industry may be “overblown” as other glove makers are cautious in growing their new capacity since 2Q19.
“Supermax indicated that it has not witnessed any major margin compression in the glove segment of its business amid heightened pricing competition due to supply-led industry dynamics from recent increase in overall glove sector capacity.
“We expect downward corrections in latex and nitrile raw material prices,” the research house noted.
Meanwhile, CIMB Research pointed out Supermax has set aside up to RM15mil capital expenditure (capex) annually for advertisement and promotional activities in the contact lens segment for the next two years.
It said the capex is likely to boost sales of its own-brand products like Aveo, more aggressively to 40% of its total contact lens segment.
“We gather that revenue contribution from this remains small, less than 5% of total revenue of FY18, and this segment is loss-making at pretax level in FY19,” it said.
Having said that, CIMB Research expects Supermax’s contact lens segment to be loss-making for the next two years.
Nonetheless, it believes that stronger earnings from its glove division and lower-than-expected losses from its contact lens unit are potential re-rating catalyst.
As such, CIMB Research is maintaining an “add” recommendation with a target price of RM2.23 based on 18.3 times price-to-earnings ratio (PE) for CY20F.
“In our view, Supermax’s risk-reward profile remains appealing. Its current valuation of 12.9 times PE for CY19F is below its 5-year mean (15.2x) and 44% discount to the sector’s weighted average (23.1x),” it said.
Moving forward, the risks to CIMB’s recommendation are stiffer-than-expected pricing competition and a sharp strengthening of ringgit compared to the greenback.
The existing plants are namely Block F and Lot 38 in Perak and Selangor respectively.
Currently, Supermax is also in the midst of constructing one new glove plant, Plant 12 in Klang, with 4.4 billion pieces per year capacity. The plant’s commissioning will be in two phases, Phase 1 (2.2 billion) by third quarter of calendar year 2019 (3QCY19) and Phase 2 (2.2 billion) by 1QCY20.
Given the competition in the glove industry, CIMB Research said that the margin compression in the industry may be “overblown” as other glove makers are cautious in growing their new capacity since 2Q19.
“Supermax indicated that it has not witnessed any major margin compression in the glove segment of its business amid heightened pricing competition due to supply-led industry dynamics from recent increase in overall glove sector capacity.
“We expect downward corrections in latex and nitrile raw material prices,” the research house noted.
Meanwhile, CIMB Research pointed out Supermax has set aside up to RM15mil capital expenditure (capex) annually for advertisement and promotional activities in the contact lens segment for the next two years.
It said the capex is likely to boost sales of its own-brand products like Aveo, more aggressively to 40% of its total contact lens segment.
“We gather that revenue contribution from this remains small, less than 5% of total revenue of FY18, and this segment is loss-making at pretax level in FY19,” it said.
Having said that, CIMB Research expects Supermax’s contact lens segment to be loss-making for the next two years.
Nonetheless, it believes that stronger earnings from its glove division and lower-than-expected losses from its contact lens unit are potential re-rating catalyst.
As such, CIMB Research is maintaining an “add” recommendation with a target price of RM2.23 based on 18.3 times price-to-earnings ratio (PE) for CY20F.
“In our view, Supermax’s risk-reward profile remains appealing. Its current valuation of 12.9 times PE for CY19F is below its 5-year mean (15.2x) and 44% discount to the sector’s weighted average (23.1x),” it said.
Moving forward, the risks to CIMB’s recommendation are stiffer-than-expected pricing competition and a sharp strengthening of ringgit compared to the greenback.
http://www.thestar.com.my/business/business-news/2019/04/30/increased-capacity-expected-to-drive-supermax-earnings-growth/
