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RHB Research PP 7767/09/2012 (030475)7 March 2013

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MARKET DATELINE

MALAYSIA EQUITY

Investment Research

Visit Note

Supermax Corporation

An Aggressive Push I nto Nitrile Territory

We expect Supermax to deliver healthy earnings growth of 15-23%

over the next two years driven by the additional nitrile glove capacity

coming onstream at its two new plants. We are maintaining our Buy

call on Supermax with an unchanged fair value of RM2.68.

Ample supply of raw materials coming onstream in FY13.Management expects nitrile prices to stabilise between US$1,200-1,500/tonne on expectations of ample supply coming into the market. An

additional 250,000 tonnes of new nitrile production capacity came into themarket in FY12. With nitrile material suppliers operating at only 65-75% oftheir full capacity currently, any surge in demand for nitrile raw materialcan be accommodated easily. Similarly, management does not expect anyshortages in the supply of natural latex as most rubber plantations inSoutheast Asia are expected to reach maturity and begin producing latexfrom this year onwards.

Future expansion focuses on nitrile gloves. Despite intensifyingcompetition within the nitrile glove segment, management has remainedsteadfast in focusing its new capacity to the production of nitrile glovesgiven the relatively-higher margins and less-volatile raw material prices.Management guided for another 5.4bn pieces in nitrile glove productioncapacity via the construction of two new plants at Lot 6058 and 6059. Upon

full-commissioning by 2H, Supermaxs nitrile glove production capacitywould increase to 12.3bn pieces p.a. (from 6.9bn currently).

Forecasts. No change to our earnings forecasts. Investment case. We expect Supermax to deliver strong earnings growth

for FY13, driven by the additional nitrile glove capacity onstream from 2H

onwards. We thus maintain our Buy call on the stock with an unchangedfair value of RM2.68 (CY13 PER of 13x).

David Chong603 9280 [email protected]

BUY Target RM2.68

Previous RM2.68

Price RM1.92

Healthcare

Supermax Corporation is an investment

holding company. The principal activities

of its subsidiaries are manufacturing and

distribution of medical gloves.

Stock StatisticsBloomberg Ticker SUCB MK

Market Cap RM3,677.2m

USD1,221.9m

52 wk H/L price 2.25 1.63

3m ADT RM1.8m

YTD Returns -3.5%

Beta (x) 1.6

Major Shareholders (%)

Dato Seri Stanley Thai 20.5

Datin Seri Cheryl Tan 15.2

EPF 8.3

Share Price Performance (%)

Month Absolute Relative1m 0.0 -2.3

3m -1.5 -4.6

6m -6.3 -6.9

12m -2.5 -7.1

6-month Share Price Performance

Source: Bloomberg

Forecasts and Valuations Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F

Total turnover (RMm) 977.3 1021.4 1048.4 1135.7 1376.5

Recurring net profit (RMm) 158.9 104.2 121.2 139.8 172.3

Recurring net profit growth (%) 25.6 -34.5 16.3 15.4 23.2

Core EPS (sen) 24.0 15.7 17.8 20.6 25.4Core EPS growth (%) -0.7 -34.5 13.6 15.4 23.2

DPS (sen) 7.5 4.8 5.0 6.2 7.6

Dividend Yield (%) 3.9 2.5 2.6 3.2 4.0

Core P/E (x) 8.0 12.2 10.8 9.3 7.6

Return on average equity (%) 25.4 14.3 14.3 15.4 17.0

P/B (x) 1.9 1.7 1.7 1.4 1.2

EV/EBITDA (x) 8.6 13.7 10.1 7.6 6.3

Net debt to equity (x) 0.3 0.3 0.3 0.2 0.2

RHB vs consensus EPS (%) - - - -2.4 6.2

Source: Company data, RHBRI estimates


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FINANCIAL

Profit & Loss (RMm) Dec-10 Dec-11 Dec-12 Dec-13F Dec-14F

Turnover 977.3 1021.4 1048.4 1135.7 1376.5

Turnover growth(%) 21.6 4.5 2.6 8.3 21.2

EBITDA 174.7 111.8 151.0 200.1 244.5

EBITDA margin (%) 17.9 10.9 14.4 17.6 17.8

Depreciation & amortisation -26.0 -24.1 -24.3 -30.6 -33.7EBIT 148.6 87.7 126.7 169.5 210.7

EBIT margin (%) 15.2 8.6 12.1 14.9 15.3

Net Interest -13.6 -12.5 -13.1 -13.1 -9.0

Associates 42.0 34.8 23.4 30.4 39.5

Exceptional items 0.0 -4.0 0.0 0.0 0.0

Pretax Profit 183.8 112.1 140.2 164.4 210.0

Pretax margin (%) 18.8 11.0 13.4 14.5 15.3

Tax -24.9 -8.1 -18.7 -24.7 -37.8

PAT 159.0 104.1 121.5 139.7 172.2

Minorities 0.0 0.1 -0.3 0.1 0.1

Net Profit 158.9 104.2 121.2 139.8 172.3

Net Profit margin (%) 16.3 10.2 11.6 12.3 12.5



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BRIEFING NOTE

We attended Supermaxs 4QFY12 briefing yesterday. We set out below the keyhighlights from the briefing.

Ample supply of raw materials coming onstream in FY13. SupermaxsFY12 revenue came in at RM1.05bn (vs. RM1.02bn in FY11) as the increase in

production volume arising from 7 new surgical glove lines and refurbishment ofolder lines together with a marginally stronger US$ rate of RM3.09/US$ (FY11:RM3.06/US) helped offset the downward revision in ASPs to pass on the lowerraw material prices. Recall that 4QFY12 revenue was sharply higher thanks to

the 7 new surgical glove lines, which came into production during the quarteras well as the seasonal year-end restocking activities. FY12 EBIT margins alsoexpanded by 3.3%-pts mainly due to lower nitrile (-22.0% yoy) and naturallatex (-26.1% yoy) costs. Thus, despite the lower FY12 associate contributionof RM23.4m (vs. RM34.8m in FY11), net profit rose by 16.6% yoy.

Moving forward, management expects nitrile prices to stabilise betweenUS$1,200-1,500/tonne on expectations of ample supply coming into themarket. An additional 250,000 tonnes of new nitrile production capacity cameinto the market in FY12. Management mentioned that with nitrile materialsuppliers operating at only 65-75% of their full capacity currently, any surge in

demand for nitrile raw material can be accommodated easily.

Similarly, management does not expect any shortages in the supply of naturallatex as most of the rubber plantations in Southeast Asia are expected to reachmaturity and begin producing latex from this year onwards. Management,however, expressed its concern that the tripartite agreement between Malaysia,Indonesia and Thailand to support rubber prices could lead to a recovery inlatex prices.

While we concur with management regarding a possible recovery in latex pricesover the next three months, we believe that the recovery would only betemporary on the back of the seasonally weaker production during thewintering season. We expect any recovery in latex prices to be capped at belowthe RM7.00/kg mark during the wintering period given weak global demand forrubber. Beyond that, there could be downward pressure on latex prices as most

of the rubber trees planted in 2005 and 2006 would begin producing latex fromthis year onwards. Despite expectations of greater supply of nitrile and latexraw material coming into the market this year, we are keeping our FY13-15latex and nitrile price assumptions of RM7.00-7.40/kg (currently RM6.15/kg)and US$1,500-1,700/tonne (currently US$1,350/kg) unchanged onexpectations of a recovery in global vehicle production from 2H13 onwards.

Forex to strengthen gradually. YTD, the US$ has strengthened by 1.5% toabout RM3.10/US$ currently (from RM3.06/US$ in early-Jan), which we believewas caused by a reversal of capital flows. Moving forward, we expect the ringgitto strengthen to around RM3.05/US$ and further to RM2.95-3.00/US$ by FY14-15 once the outflow normalises. No change to our earlier FY13-15 forex rate

assumptions of RM2.95-3.05/US$.

Automation works to be completed by end-2013. Labour cost currentlyaccounts for approximately 9-10% of Supermaxs total production cost. Whilethe implementation of the minimum wage policy could increase labour cost byRM13-14m p.a. (and thus lower our FY13-15 earnings forecasts by 5.6-7.9%p.a.), we understand that Supermax and the other glove manufacturers havetaken preemptive measures to pass on the additional labour costs to theircustomers by revising up their ASPs by US$0.75-1.25 per 1,000 pieces. Inaddition, management intends to spend approximately RM65.8m to automateall its plants. Upon full automation by end-2013, this could reduce Supermaxslabour costs by approximately 40-50%, translating into additional savings of

RM20-25m p.a..


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Future expansion focuses on nitrile gloves. While the new supply of nitrilecoming on-stream in 2013 could help ensure sufficient supply of nitrile rawmaterial in the industry, the nitrile gloves segment continues to face rising pricecompetition as most of the glove makers are focusing their capacity expansionplans on nitrile gloves. Furthermore, the weak latex prices could result in price-sensitive customers shifting purchases back to latex gloves.

Nevertheless, despite intensifying competition within the nitrile glove segment,management has remained steadfast in focusing its new capacity to theproduction of nitrile gloves given the relatively-higher margins and less-volatileraw material prices. Management guided for another 5.4bn pieces p.a. in nitrileglove production capacity via the construction of two new plants at Lot 6058and 6059. Upon full-commissioning by 2H, Supermaxs nitrile glove productioncapacity would increase to 12.3bn pieces p.a. (from 6.9bn currently). Apartfrom the above, we believe that the industry-wide migration towards theproduction of nitrile gloves would help reduce the competition that Supermaxfaces in the natural rubber gloves segment. We expect Supermax to benefitfrom this given that latex gloves make up approximately 60% of its productmix.

Maintaining a 30% dividend payout policy. Supermax paid a net DPS of 5sen for FY12 (FY11: 4.75 sen), translating into a net yield of 2.6% and adividend payout ratio of 28%. Moving forward, management has indicated thatit would maintain its dividend payout policy of 30% of its net profit.

Investment case. Moving forward, we expect Supermax to deliver strongearnings growth for FY13, driven by the additional nitrile glove capacityonstream from 2H onwards. We thus maintain our Buy call on the stock with anunchanged fair value of RM2.68 (CY13 PER of 13x).

Table 1 : Capacity expansion plansFactory Capacity Status

Lot 6058 2.2bn pieces Commercial production to commence by Aug 13.

Lot 6059 3.2bn pieces Commercial production to commence by Jul 13.

Source: Company date

Table 2 : Forecast AssumptionsFYE Dec (RMm) FY13f FY14f

Average capacity (bn pcs) 22.8 28.1

Utilisation rate (%) 60.7 71.9

Change in ASP (%) 4.0 4.0



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RECOMMENDATION HISTORY

Date Recommendation Target Price Price

02/01/2013 BUY 2.70 1.96

21/12/2013 BUY 2.70 1.97

28/11/2012 BUY 2.70 2.01

23/08/2012 BUY 2.70 2.13

22/08/2012 BUY 2.70 2.13

29/05/2012 BUY 2.50 1.79

02/03/2012 BUY 2.50 1.99

29/02/2012 BUY 2.50 1.93


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RHB Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months

Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain

Neutral: Share price may fall within the range of +/- 10% over the next 12 months

Take Profit: Target price has been attained. Look to accumulate at lower levels

Sell: Share price may fall by more than 10% over the next 12 months

Not Rated: Stock is not within regular research coverage

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Documents

Supermax.pdf