Supermax ... Apr10

S & P Results Review & Earnings Outlook

• Supermax reported results that were significantly higher than expectations. 1Q10 net profit of MYR51.5 mln accounted for 34% of our previous 2010 forecast, as margins came in higher than expected.

• Strong glove demand and higher average selling price (ASP) contributed to a 15% YoY rise in 1Q10 revenue to MYR220.7 mln. In addition, better cost efficiency and productivity helped to boost operating margin to 21.6% from 10.6% in 1Q09 and operating profit by 134% YoY to MYR47.6 mln from MYR20.4 mln.

• During the 1Q10 period, latex price surged to an average MYR7.04/kg (+32% QoQ) while USD weakened 1% QoQ against MYR. Despite the headwind, 1Q10 revenue improved 12% QoQ (+8% QoQ in volume sales coupled with +4% QoQ in ASP) while operating profit grew 4% QoQ. Nevertheless, the time lag between adjusting ASP and higher cost (latex) is evident from a marginal squeeze in the operating margin from 23.3% in 4Q09.

• We expect the subsequent quarters to remain robust in terms of glove demand as many customers have delayed orders, considering the recent high latex price. To reflect the stronger 1Q10 margins achieved, we adjust our cost assumptions and lift our 2010 and 2011 earnings estimates to MYR171.7 mln (from MYR152.1 mln) and
MYR195.9 mln (from MYR172.3 mln) respectively.

Recommendation & Investment Risks

• We maintain our Strong Buy recommendation on Supermax with a higher 12-month target price of MYR8.50 (from MYR7.00), after rolling over our valuation year.

• We utilize a target PER of 11x (from 12x) against our projected 2011 (rollover from 2010) EPS for Supermax and add our estimated tax exempt net DPS for 2010 of 11 sen. The reduced target multiple is in line with the reduction in peer average.

• We expect Supermax to continue benefiting from the continued supply-demand imbalance. The recently approved U.S. Healthcare Reform Bill will also add to the glove demand strength over time, as 32 million uninsured Americans will now gain access to healthcare, which will eventually boost demand for gloves. We continue to retain our positive view on Supermax, given that it trades at an undemanding
2010 PER of 9.9x relative to the forecast 2010 EPS growth of 32%.

• Risks to our recommendation and target price include a sudden downturn in glove demand, volatility in latex price and a significant appreciation of the MYR, as revenue is predominantly derived from exports.