Continued strong global demand for rubber gloves to bode well for Supermax

KOTA KINABALU: Continued strong global demand for rubber gloves will bode well for Supermax Corporation Bhd (Supermax), analysts project after the group’s briefing.

The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) had opined following the briefing that the continued strong global demand for rubber gloves, with global consumption of rubber gloves expected to rise to 246 billion pieces per annum in 2018, will bode well for the company.

“Furthermore, the rubber gloves export from Malaysia is also expected to grow to RM18.6 billion in 2018 from RM16.2 billion in 2017 and a compound annual growth rate (CAGR) of 10.7 per cent over the past 14 years in terms of gloves export value signifies both a solid and sustainable growth in demand for rubber gloves going forward,” MIDF Research said.

Additionally, the research arm was positive on the fact that management has clarified on the direction of the company going forward which concentrates on improving and expanding Supermax’s existing production capacities via the two-pronged approach.

Supermax’s briefing with analysts had outlined, among others, the group’s longer-term plans for Glove City (Bukit Kapar), Serendah (Supermax Business Park) and decommissioning of biomass-fired plant in Lahat.

According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), the Glove City, initially comprising four plants is likely to be scaled down since it has to surrender about one-third of land to the Government for the West Coast Highway.

Kenanga Research noted that there could be potentially gains from this compulsory acquisition considering that the land was bought back at RM11 per square foot (sq ft).

“As such, the group has to resubmit plans for the plant. The 100-acre land in Serendah is expected to be sub-divided whereby 60 per cent is earmarked for gloves manufacturing support businesses and factories,” the research arm said.

“The remaining 40 per cent is for expansion of new glove manufacturing plants.”

Kenanga Research was not overly concerned with funding considering that Supermax has a net gearing of 23 per cent as at December 31, 2017 and operating cashflow which the researhch arm forecasted will average at RM150 million.

“Additionally, profits gained from sale of the factories built for the supporting businesses can be ploughed back into the capex for Glove City.”

As for Supermax’s contact lens business which is presently loss-making, Kenanga Research noted that they were not guided in terms of average selling prices (ASPs), volume and margins for the business.

“However, cursory check on listed manufacturers like Cooper Vision (subsidiary of Cooper Companies, a global medical device company) revealed that gross margin for the business ranges between 57 per cent and 65 per cent.”

On another note, MIDF Research highlighted that management had shared Supermax is expecting the group’s third quarter of financial year 2018 (3QFY18) earnings to be hit by the 23 per cent hike in natural gas tariff.

“We understand that the hike in natural gas tariff will cost the company about RM7 million in profit as the company had a lag period of two months in fully transferring the cost increase to their customers,” it said.

“That said, the cost increase was fully-transferred to the customers starting from March 2018 onwards.”

Due to this, the research arm expected SupermaxÕs earnings for 3QFY18 to come in between RM28 million to RM30 million.

For FY18F, MIDF Research thus maintained its earnings forecasts for now despite expecting three new lines to start commissioning in early May 2018. Its net profit for FY18F amounted to RM123.2 million.

The research arm believed that the impact from the 23 per cent hike in natural gas tariff would offset the revenue coming from the three new lines.

That said, MIDF Research revised its earnings forecasts for FY19F up by 14.1 per cent to RM149.9 million as the research arm expected higher revenue to come in due to the commissioning of newly replaced production lines in its Sg. Buloh and Taiping plants as well as new production lines from Block F in Taiping as well as Plant 12 in Klang.

Meanwhile, Kenanga Research upgraded both its FY18E and FY19E net profit by 13 per cent to take into account higher volume sales from the new capacity expansion.

As such, the research arm’s net profit for FY18E and FY19E amounted to RM123.2 million and RM123.4 million, respectively.