Supermax banks on lower latex prices

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LOWER PRODUCTION COSTS: Photo shows Supermax’s exhibition booth at an international conference in Germany. The glove maker is benefiting from the currently low natural rubber prices as its production costs have been reduced.

KUCHING: Supermax Corporation Bhd (Supermax), a leading glove maker with a market capitalisation of RM1.45 billion, is benefiting from the currently low natural rubber prices as the group’s manufacturing costs have been reduced and it plans on production capacity expansion moving forward.

The group’s core earnings of RM57.9 million for the first half of financial year 2012 (1HFY12) were within expectations, representing 46 per cent of consensus’ full-year estimates.

The reported revenue of RM480.6 was flat year -on-year (y-o-y) – despite higher volume sales – due to lower average selling prices (ASPs) but better cost efficiency and lower latex prices, had caused the group’s core earnings to shoot up 23 per cent y-o-y.

OSK Research Sdn Bhd (OSK Research) analyst Mandy Teh stated in a research note yesterday, “Year to date, profit before tax ( PBT) and core earnings jumped, thanks to lower raw material costs which fell by 27 per cent during the (second) quarter (mainly latex), as well as improved operating efficiency at its factories across the board.

“The better operating efficiency as well as prudent cost control led to an improvement in PBT and core earnings, which went up at a healthy eight per cent and seven per cent growth pace respectively to RM33 million and RM30 million.

“Supermax should continue to see healthy results in the upcoming quarters, boosted by higher production capacity as well as the introduction of new products,” the analyst opined.

She noted that the average latex price dropped four per cent quarter-on-quarter (q-o-q), where the average price in the first quarter of 2012 (1Q12) was RM7.46 per kilogramme (kg) versus RM7.16 per kg in 2Q12.

This had resulted in increases in Supermax’s earnings before interest, tax, depreciation and amortisation (EBITDA), PBT and core earnings margins, which widened by 400 basis points (bps), 200bps and 165bps q-o-q respectively.

“Latex prices – currently at RM5.33 per kg – have been easing due to tepid demand for rubber as a result of a slowdown in the automotive industry. “That said, we believe that the decline in vehicle sales has led to delays in restocking by tyre manufacturers, which has in turn dampened the demand for natural rubber.

“In the near term, we expect latex prices to remain weak on expectations that demand would remain lacklustre for the rest of the year.

“As such, glove manufacturers may still enjoy a fair degree of margin expansion as they benefit from the time lag in passing on the lower latex cost to their customers.”

Meanwhile, the research arm of Kenanga Investment bank Bhd (Kenanga Research) opined that the group’s revenue would be driven by capacity expansion going forward.

“The surgical glove capacity expansion at the Sg Buloh plant is progressing with four of the seven lines planned having been commissioned since May 2012. The remaining lines will continue to be commissioned in stages.”

Pointing out that surgical gloves were currently oversold by six months, Kenanga Research added that the group was also moving ahead with its plans to build and complete plants in Klang which would be inter-switchable between natural rubber and nitrile glove production.

By the 4Q13, Supermax’s current nitrile capacity would double from 5.2 billion pieces to 10.5 billion pieces per annum, the research house highlighted.

Kenanga Research revealed a target price of RM2.50 per share, based on 11 times FY12 earnings per share while noting forecast risks: higher latex prices and a stronger ringgit.

Meanwhile, Teh rolled over OSK Research’s valuations to FY13 which pushed up its fair value of the stock to RM2.70 per share from RM2.50 per share previously.