Supermax ... July10

• Maintain BUY. Supermax’s comments during its briefing at our Small to Mid Cap Conference were broadly in line with our expectations save for one negative surprise – confirmation that the delivery of equipment for its new lines will be delayed by a few months. However, the group is steadfast in its belief that its capacity expansion to 17.6bn pieces this year is on target. Management also confirmed that its progressive expansion plans will lead to higher sales starting 2Q. We maintain our BUY call and hold the view that its upcoming quarters should at least match its 1Q earnings, helped by the progressive expansion and growing demand. These factors could extend the stock’s re-rating. Our target price remains intact at RM9.50, still pegged to 13.2x P/E or a 20% discount to Top Glove’s target
P/E of 16.5x. The stock remains one of our top picks for the sector.

• Promising demand outlook. Supermax remains upbeat on its prospects, underpinned by the robust demand outlook. Global consumption of gloves is expected to continue growing at 8-10% annually. There should also be spillover effects from changes in healthcare regulations. Although North America currently dominates Supermax’s sales, management sees promising prospects for the South America and Asian markets, which currently make up only 16% and 6% of Supermax’s sales mix, respectively. For Asia, step-ups in healthcare reforms in the economic powerhouses of China and India are expected to create a new wave of growth.

• 2Q10 earnings to exceed 1Q10? During the presentation, management hinted that 2Q’s financial performance could be even better than 1Q’s core net profit of RM51.5m, thanks to newly installed capacity. But it is sticking to its FY10 earnings guidance of RM168m though it did qualify that this target could be revised upwards again in the coming quarters.