Supermax’s 1Q17 net profit below expectations, earnings forecasts downgraded
K UCH I NG: S up e rma x Corporation Bhd’s (Supermax) f irst quarter of 2017 ( 1Q17) net profit has come in below analysts’ expectations, leading to a downgrade in earnings forecasts.
In a filing on Bursa Malaysia, Supermax said it recorded earnings before interest, tax, depreciation and amortisation ( EBITDA) and profit before tax amounted to RM37.32 million and RM26.49 million respectively.
The group recorded EBITDA and PBT margins of 13.9 per cent and 9.8 per cent respectively.
According to the research arm of MIDF Amanah Investment Bank Bhd ( MIDF Research), Supermax’s 1Q of f inancial year 2017 (1QFY17) earnings of RM19.5 million came in below its and consensus’ full year expectations.
Supermax’s 1Q17 net profit of RM19.5 million also came in below expectations at 13 per cent and 14 per cent of the research arm of Kenanga Investment Bank Bhd’s ( Kenanga Research) and consensus full- year net profit forecasts, respectively.
De s pi t e i nt ense pr ic e competition, Supermax managed to raise sequential average selling prices ( ASPs) partly due to the group’s own brand manufacturing (OBM) model.
“Growth going forward, earnings growth is expected to be driven by two new plants, namely Plant 10 and Plant 11 i.e. Lot 6059 and 6058 in Meru, Klang,” the research arm said.
The research arm further noted that these two plants are expected to ramp up capacity by 32 per cent to 23.2 billion pieces by 3Q of current year 2016 (CY16), catering entirely to producing nitrile gloves, and have started commissioning and are presently running eight double former lines equivalent to 2.2 billion pieces (installed capacity rose 12 per cent to 19.8 billion pieces as at December 31, 2015).
“The remaining balance of 3.4 billion pieces capacity is expected to be commercially ready over the next six to twelve months,” it added.
On forecast s, Kenanga Research downgraded its FY17E and FY18E net profits by eight per cent each to take into account the higher-than- expected expenses incurred from its contact lens business.
Correspondingly, the research arm lowered its target price from RM2.83 per share to RM2.60 per share based on unchanged 13fold FY17E earnings per share ( EPS) (at + 0.5 standard deviation (SD) above Kenanga Research’s historical forward average).
However, Kenanga Research maintained ‘ outperform’ on Supermax.
MIDF Research also revised its earnings forecasts for FY17-18F down by 24.4 per cent and 25 per cent respectively in view of the current increase in raw material prices that could put pressure on margins.
Key risks to the research arm’s earnings would most likely be aggressive competition which may squeeze margins and ASP, strong appreciation of Ringgit and continued delay in capacity expansion.
Post earnings announcement and after rolling forward its valuation to FY18, MIDF Research downgraded its recommendation on Supermax to ‘ neutral’ with a revised target price of RM2.42 per share.
The research arm’s target price was derived via pegging its FY18F EPS of 17.3sen to an unchanged price earnings ratio ( PER) of 14- fold, which was Supermax’s three-year average PER.
“We think that despite the strong demand for rubber gloves going forward, the increasingly intense competition as well as the increase in raw material prices could potentially pressure margins and ASP,” it said.
That said, MIDF Research did think that the company will benefit from the current currency environment namely the strong US dollar appreciation against ringgit.
However, the research arm did not think the current situation will persist in the longer term.