Better quarterly outlook expected for Supermax

KUCHING: AllianceDBS Research Sdn Bhd (AllianceDBS Research) has revealed that it sees a better outlook for Supermax Corporation Bhd ( Supermax) these coming quarters, based on the research house’s recent discussion with management.

According to AllianceDBS Research, Supermax has an ambitious expansion plan, with multiple projects planned over the next decade.

“However, poor access to proper infrastructure, which are water, electricity and gas supply, has been holding back its expansion plans. Plants 10 and 11 have a better outlook now that eight out of 20 lines are fully commissioned, increasing the total capacity to 19.8 billion gloves as at end-December 2015.

“The remainder of the 12 lines with a capacity of 3.4 billion gloves will be commissioned by June 2016, as guided by management,” the research house said

Given the strong earnings posted in the past few quarters, the research house believed that the infrastructure issues may have been resolved.

AllianceDBS Research noted that the utilisation rate dropped marginally by three percentage points ( ppts) year on year (y- o-y) to 80 per cent in financial year 2015 ( FY15), as plants 10 and 11 came online, and this is expected to recover to 83 per cent in FY17F.

“The additional capacity from Bukit Kapar will see its utilisation rate drop again in FY18F,” the research house said.

Premised on this, AllianceDBS Research expected sales volume to grow by 15 per cent/10 per cent/10 per cent in FY16/17/ 18F.

It added that this translates into a three-year compound annual growth rate ( CAGR) of 12 per cent.

AllianceDBS Research explained that this is because Supermax’s profit margins can fluctuate even if there is no change to unit profitability, as the group practiced cost pass-through pricing (which has a time lag of one to two months).

The research house noted that under this pricing mechanism, profit margins can rise when costs drop (which is the same level of profits on lower average selling price (ASP)), and margins can drop when costs rise (which is the same level of profits on higher ASP), with no consequences on the bottomline.

AllianceDBS Research projected earnings before interest and tax per 1,000 (EBIT/k) gloves to improve in FY16F, backed by productivity and efficiency gains from upcoming lines and cheaper raw materials.

Thereafter, the research house conservatively assume EBIT/k gloves will grow by 11 per cent/ six per cent in FY16/17F.

On equal sales contribution from natural rubber ( NR) and nitrile products, AllianceDBS Research expected this trend to remain, pending the completion of the new plants.

Plants 10 and 11 are expected to take the NR: nitrile mix to 45: 55.