- We reiterate our HOLD call on Supermax Corp but lower our fair value from RM2.40/share to RM2.20/share in tandem with the 8%-16% cut in our FY15F-FY16F earnings estimates following its disappointing FY14 results. Our fair value is pegged to an unchanged FY15F PE of 12x.

- Supermax reported a lower 4QFY14 net profit of RM20mil (QoQ: -28%; YoY: -20%) to end its FY14 with earnings of RM101mil (-YoY: 16%). The results missed expectations, accounting for only 88% of our and consensus estimates.

- The group also proposed a final single-tier dividend of 3 sen/share to bring its total FY14 dividends to 5 sen/share – on par with FY13’s. This translates to a payout ratio of 34% (FY13: 28%) and yield of 2.3%.

- Key reasons for its weak FY14 performance include:- (1) lower production volumes following the fire at its Malacca plant back in 4QFY13 (production had only normalised in 3QFY14); as well as (2) lower contributions from its associates (YoY: -44%).

- We believe that the group’s FY14 earnings were also capped by its limited capacity following prolonged delays in the commissioning of Plant 10 and 11 (combined: +6.9bil nitrile pcs). That said, we understand that construction of the plants have now completed and the new lines will be fully-commissioned by end-FY15F.

- On a sequential basis, the group’s revenue was lower (-7%) due to price competition in the nitrile glove segment. While there was a marginal QoQ expansion in its EBITDA margin, the gains were negated by its usual year-end tax adjustments (QoQ effective tax rate more than doubled to 38%). This resulted in its 4QFY14 net profit falling by 28% QoQ, while at the PBT level, it was higher by 0.5%.

- Earnings aside, we note that Supermax’s share price has recovered well from its 16% plunge on 15 December 2014 – when its group MD, Datuk Seri Stanley Thai was charged with insider trading in relation to APL Industries Bhd (APLI). The stock has since jumped 35%, spurred in part by the recent strengthening of the USD:RM exchange rate (+8%), of which the sector is a prime beneficiary.

- At the current price, the stock is trading at FY15F-FY17F PEs of 10x-12x. We maintain our view that the key re-rating catalyst for the group would be the smooth execution of its expansion plans, namely its Glove City and Supermax Business Park. Work on both projects, which will be run concurrently, is expected to begin in FY15F.

- The group is also reportedly mulling over the closure of one of its glove plants (which is due for upgrading) to diversify into the manufacturing of high-tech medical devices, which garner better margins. Details of this move are expected to be announced in July 2015.

Source: AmeSecurities