Wednesday, 10 January 2018

Supermax (4) - Heading towards RM3.36 ?

Publish date: 

Few days ago, Top gloves announced a strong set of results. EPS grew by 44% y-o-y. 

Yesterday, it was Comfort's turn. EPS also grew by 44% y-o-y. 

As mentioned in my earlier article dated 24 November 2017, China's closing down of glove manufacturing factories has swung many glove users to source from Malaysia. This is a structural change that is likely to benefit Malaysian glove manufacturers for many years to come.

Due to Malaysia's unique position as the dominant gloves manufacturing country, our glove industry seemed to have strong international pricing power. This is evidenced by the fact that whenever cost goes up (either due to hike in latex price or the recent increase in natural gas, etc), Malaysian manufactures have always been able to pass the cost to users. This makes the industry very closed to the type liked by Warren Buffett - a moat that protect the producers from competition and unfavourable factors such that they can consistently make money over an extended period of time ? 

Apart from pricing power, the glove industry also has plenty of room to grow. Even though Malaysian glove manufacturers had been growing for many many years (easily 10 years or more), only about 17% of world population use gloves extensively (mostly developed nations). Meaning that there are still 83% of the world market remained untapped. In this regard, we can expect the industry to continue growing almost indefinitely. It is a proxy to world economic growth. 

Backed by the above favourable factors, I believe the market is rational to ascribe high valuation multiples to gloves stocks. Top Gloves, Hartalega, Kossan has PE multiples of 27 times, 52 times and 29 times respectively. For whatever reason, let's assume Supermax deserves a discount and as such, PE multiple of only 20 times. Based on EPS of 16.8 Sen (being latest Q EPS of 4.2 Sen annualised), the stock is potentially worth RM3.36.

A screaming buy at current level.

As for Stanley Thai and his little adventure, I believe he will eventually emerge unscathed (pay the fine but no jail).

Having said so, it is your money - your risk, your return. So don't blame me if things don't work out well. 

Have a a nice day.





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