Supermax

Bargain Hunting Opportunity ?

Publish date: Sat, 27 Dec 2014, 11:19 AM 

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(Poor Stanley)

1. Introduction

On 15 December 2014, Supermax's controlling shareholder Stanley Thai was charged for insider trading of APL shares back in 2007. As a result, Supermax share price dropped from RM2.00 to RM1.70, a decline of 15% in a single day.

(decline could be as high as 26% if you take RM2.30 as the reference price to factor in the possibility that insiders had been selling ahead of the news of court case. Please refer to the chart below)

In my opinion, the court case affects Stanley Thai and should have no bearing on Supermax's fundamentals. The decline of share price presents an opportunity to buy on weakness, especially the existing strong US Dollars environment should benefit exporters like Supermax.

(Current share price of RM1.70 is a three year low. The last time Supermax traded at lower price was approximately RM1.20 in August 2011 [ excluding 2009 global financial crisis ])

2. Company Background

The company has market cap of RM1.16 billion (680 mil shares x RM1.70).

Based on estimated net profit of RM108 mil (9 months figures annualised), PE multiple is 10.7 times. 

Based on net assets of RM954 mil, PBR is 1.22 times.

The group has cash of RM130 mil, loans of RM368 mil. As such, net gearing is 0.25 times only.

3. Historical Profitability

The table below sets out the Group's P&L for FY2013 and 9 months ended September 2014. 

									9 months
	Q1	Q2	Q3	Q4	FY2013	Q1	Q2	Q3	FY2014
Revenue	320.5	330.0	284.6	192.2	1,127.3	232.3	238.1	278.4	748.8
Expenses	(284.7)	(292.6)	(245.8)	(155.5)	(978.6)	(199.4)	(205.3)	(246.2)	(650.9)
Gross profit	35.8	37.4	38.8	36.7	148.7	32.9	32.8	32.2	97.9
int expenses	(2.2)	(2.2)	(2.1)	(2.3)	(8.8)	(2.3)	(2.4)	(2.1)	(6.8)
associate	3.1	4.6	3.8	3.5	15.0	1.6	1.9	2.4	5.8
PBT	36.7	39.8	40.5	37.9	154.9	32.2	32.3	32.5	96.9
tax	(4.7)	(4.9)	(4.1)	(12.2)	(25.9)	(5.8)	(5.3)	(4.9)	(16.0)
Net profit	31.8	35.5	35.8	25.0	128.1	26.6	26.8	27.8	81.2
gross margin (%)	11.2	11.3	13.6	19.1	13.8	14.2	13.8	11.6	13.1
USD : RM	3.081	3.070	3.240	3.207	3.150	3.297	3.234	3.193	3.241
effective tax rate (%)	12.8	12.3	10.1	32.2	16.7	18.0	16.4	15.0	16.5

Key observations :-

(a) As the group exports almost all its products, its earnings should benefit from stronger US Dollars.

(b) The group has been reporting net profit of approximately RM35 mil per quarter in first nine months of 2013. However, in Q4 2013, a fire broke out in its Alor Gajah plant (Melaka) which disrupted its operation. Since then, net profit has been in the region of approximately RM25 mil per quarter. Operation at the affected plant has been fully restored by September 2014.

(c) The group's Q3 2014 net profit was adversely affected by, inter-alia, exchange losses of approximately RM5.9 million and automation programme at certain plants (which causes production disruptions).   

4. Peers Comparison

Supermax is trading at steep discount to other industry players from PER and PBR point of view.

	market cap	net profit	PER	Net assets	PBR	div yield
	(RM mil)	(RM mil)	(times)	(RM mil)	(times)	(%)
Hartalega	5,468	212	25.8	1,124	4.86	2.0
Kossan	2,950	144	20.4	788	3.74	0.8
Supermax	1,156	108	10.7	954	1.21	2.9
Top Glove	2,827	179	15.8	1,450	1.95	3.5

Dividend yield is reasonable at 2.9% (5 sen per share). According to the CEO, the company has a policy of paying out 30% of its net profit as dividend.

5. Concluding Remarks

(a) Supermax is currently trading at steep discount to its peers. All this while, I have never invested in gloves manufacturers as they seldom come cheap.

However, Supermax's series of recent misfortunes presented an opportunity to gain exposure (not withstanding the fact that buying into a 10 times PE mutiple is not really a bargain, if not for world class players such as Malaysian gloves manufacturers).

(b) With Ringgit weakened significantly recently against the US Dollars, the group should benefit going forward. The benefit should come from translation gain (which is expected to diminish overtime as competitive pressure leads to lower US Dollars pricing) as well as pricing competitiveness against China and Thailand based producers (whose currencies had depreciated less against US Dollars compared to Ringgit).  

(c) In this time of uncertainties, I don't have high expectation for this recent addition to my portfolio. If it can deliver 20% to 30% gain by end 2015 (with dividend per share of 5 sen and targeted share price of let's say, RM2.15), I would be pretty satisfied.

Have a nice day.