By Sherilyn Goh
Supermax’ share price rallied to a three-month high on Nov 12, riding on positive sentiment arising from the weak ringgit and strong exports data. Is it too late for investors to join the party?
Business model: Established in 1987 by Stanley Thai Kim Sim and his wife Cheryl Tan Bee Geok as a trading business distributing latex gloves, Supermax Corp Bhd eventually ventured into manufacturing its own latex gloves just two years later with a small team of employees.
The group has nine manufacturing plants producing various types of latex and nitrile gloves, which are exported to over 155 countries around the world. Its main export markets are North America and Europe, which contribute 40% and 26% respectively to total sales, South America (15%), Asia (8%), Africa and Middle East (7%), and Central America (4%).
The group also has plans to expand its export markets to include Russia and Mexico, besides counting China, India, and the United Arab Emirates as potential countries to expand its overseas distribution centres.
Different from the other three making up the “Big Four” glove makers, Supermax started out as an original brand manufacturer (OBM) with a particular stress on branding under its Supermax trademark. As of 2015, OBM made up 69.5% of the group’s total sales, with the remaining 30.5% derived from original equipment manufacturer (OEM).
This is in contrary to other local players, who place more of their focus on OEM. A few of its brands that have gained worldwide recognition include Supermax, Aurelia, and Maxter.
It produces mostly latex gloves with a production mix of latex:nitrile:surgical gloves at 52:45:3.
The group is also targeting to expand its nitrile gloves in the US dental market. The group’s largest target markets are dental and scientific laboratory (47%), medical segment (43%), food and services (4%), industrial (4%), and bio-tech (2%).
On Nov 12, the group was announced that it was awarded the UK National Healthcare Services (NHS) contract, which enables it to supply gloves to UK hospitals.
Supermax plans to increase total capacity to 25 billion pieces per annum from 17.8 billion pieces currently. Previously hindered by delays in its capacity expansion plans of its plant 10 and 11, the completion is now believed to be on track for the second quarter of 2016.
Shareholders and management: According to Bursa Malaysia, both founders Stanley Thai and Cheryl Tan hold major stakes in the company, with shareholding of 20.71% and 15.33% respectively.
Other substantial shareholders include Fidelity Investments (5.13%), Skagen AS (4.55%), and the Employees Provident Fund (4.14%).
The group’s management is helmed by Thai himself, aged 50, who is the group managing director-cum-executive chairman.
Thai graduated from the University of Windsor, Ontario, Canada with a bachelor’s degree in commerce in 1982. He started his career with Mulpha International Bhd, before being appointed to his current posts on June 18, 2000.
Tan, aged 49, graduated from the university with the same degree in 1982. Appointed as group executive director on June 18, 2000, she also heads the finance, operations and administration of the Supermax Group.
Share performance: Its share price rose to a three-month high of RM2.47 on Nov 12 on positive sentiment arising from the weak ringgit and strong Malaysian exports data.
Supermax saw smaller share price gains this year compared to its peers. Year to date (Nov 12), Supermax shares have gained 44%.
In comparison, the leading glove maker, Top Glove Corp Bhd, has gained 125% this year.
Supermax distributes 30% of its profit after tax in the form of dividends, which have been increased to current levels from 20% previously. This dividend policy is on par with Kossan Rubber Industries, but behind Hartalega Holdings and Top Glove Holdings, which distribute dividend of 45% and 50% respectively.
The group is expected to announce its latest quarterly result this month.
On Nov 19, Supermax closed 1 sen higher at RM2.48. A total of 5.14 million shares were traded.
What analysts think: Commenting on the delay of its expansion plans, MIDF Research said: “Although the expansion of these two plants have been delayed due to various external factors, we believe the management will most probably complete the expansions by 2016.”
On Nov 6, MIDF Research has initiated coverage with a “neutral” recommendation at a target price of RM2.09. The share price has since exceeded this level since Nov 12.
It noted that the group’s manufacturing plants in Malaysia are equipped with energy-saving biomass systems and an R&D centre, while its distribution centres in various countries also enable the group to market its products in overseas markets.
From 2011 to 2014, the cumulative annual growth rate (CAGR) of the group’s revenue declined by 4.9%, attributed to the lower average selling price (ASP) of gloves, although sales volume continued to record growth during the same period. The lower ASP of gloves was due to the depressed raw material prices during the same period.
“Currently, the price of natural rubber latex and synthetic latex are still depressed as the demand lags increasing supply. If this situation remain unchanged, we can expect the ASP of gloves to remain low going forward,” it said.
Despite the positive results for the profit before tax (PBT) which increased at a CAGR of 49.8% between 2011 and 2014, the CAGR for profit after tax (PAT) declined significantly by 22.6% during the same period due to higher tax expenses.
“Going forward, we expect the group’s PBT margin to remain low at circa 11% and its PAT margin to maintain at between 8% and 9%.
“The lower margin is due to the expected gradual increase in staff costs in 2016 coupled with the increase in operating expenses,” it added.
On Nov 12, AmResearch maintained its “hold” recommendation at a fair value of RM2.05 per share. The research house reiterated that key rerating catalysts resides in the smooth execution of its expansion plans.
AllianceDBS expects Supermax’ nett gearing to hover between 0.2 and 0.3 times in financial year 2015 to financial year 2017 (FY15-17). “Backed by steady free cash flow amidst stable capital expenditure investment of circa RM100 million per annum, we expect the group’s cash pile to increase from RM132 million in FY14 to RM196 million in FY17 forecast,” it said.
Earnings forecast:
StockStalk: Most glove manufacturers in Malaysia export to the rest of the world with the main export markets being North America and Europe. The currency used for export is the US dollar, while most operating expenses are incurred in the ringgit, making the current market environment the perfect storm for glove makers. (Although this excludes the purchase of nitrile which is traded in the US dollar.)
While Supermax, which is the smallest of the “Big Four” glove makers in terms of capitalisation, may be late to the share price rally party, it remains relatively cheaper in valuation for a glove stock compared to its peers who are priced at a premium.
At market closing on Nov 19, Supermax traded at 17.28 times in terms of price-earnings (PE) ratio, the lowest as compared to Top Glove which traded at 21.76 times PE, Hartalega (41.77), and Kossan (34.52).
As mentioned earlier, rerating potentials lie in the successful expansion in its operating capacity, which is previously plagued with problems. The group’s healthy balance sheet also suggests room to gear-up for its expansion plan once the infrastructure issues are resolved.
Going forward, if the ringgit is to remain weak, it looks like Supermax’ revenue growth is bound to be sustainable going forward. Like other glove stocks, it could, however, risk a slowdown if the ringgit were to stage a sustainable rebound in the near term. Perceived as safe haven for investors, glove stocks are also expected to perform better amidst market volatility.
Investors may want to hold on to the stock into 2016, and to follow closely on latest developments of its planned expansion. As for those similarly late to the party and are keen to include a glove stock in their portfolio, Supermax is certainly worth considering given higher valuations of its peers.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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