TA Securities

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MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048

COMPANY UPDATE
Monday, July 22, 2013 FBM KLCI: 1,797.74 Sector: Manufacturing

Supermax Corporation Berhad

Ripe for the Picking!
THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY*

TP: RM 2.70 (+26.8%)

Last traded: RM2.13

BUY
TA Research Team Coverage +603-2072-1277 ext: 1612 paulyap@ta.com.my www.taonline.com.my

Trouble in Paradise Q Share Information Supermax is currently experiencing issues with its Brazilian operations. Coupled o Bloomberg Code with the slashing of prices by local glove manufacturers, the depreciation of the Q Stock Code Listing Brazilian Real has made glove imports less competitive. As a result, Brazilian Share Cap (mn) customers have been increasing their purchases of locally manufactured gloves. Market Cap (RMmn) This has led to a decrease in profit contribution from Supermaxs South Par Value American operations in the 1QFY13 as share of profit of associated companies 52-wk Hi/Lo (RM) decreased to RM3.1mn from RM8.9mn. That said, management believes the 12-mth Avg Daily Vol ('000 shrs) Estimated Free Float (%) situation will improve in the future due to the unsustainability of prices offered Beta by local manufacturers. We opine that this is reasonable due to the relative size Major Shareholders (%) of Malaysian glove manufacturers in comparison to their Brazilian counterparts. Delays in Expansion Lot #6058 and #6059 have been delayed due to contractor issues. Initially scheduled to begin commissioning between June and September, the new targeted timeline is now towards the end of the year. Assuming no further hiccups, the factories will be fully commissioned by the first quarter of 2014. To recap, Lot #6058 will have 16 lines producing 2.15bn pieces of gloves/year and Lot#6059 with 24 lines manufacturing 3.22bn pieces of gloves/year. Taking this into account, we readjust our year-end total installed capacity assumption back to 17.76bn pieces of gloves/year. More importantly, due to the delay, we opine that Supermax may not be able to take full advantage of continued resilient demand for nitrile gloves. On to the surgical side, all seven lines for Lot 42 are ready. Despite this, only four out of the possible seven lines are running pending arrival of the remaining packaging machines. The three packaging machines are expected to be delivered in October. At full capacity, Lot 42 has the potential of producing 336mn pairs of surgical gloves/year. Assuming a profit margin of 15%, this could potentially yield a profit of RM32.3mn once fully commissioned. In regards to the shortage of sterilization facilities, management remains optimistic that the supply of these facilities will increase in the near future. Currently, we have only imputed earnings from the four lines, which are running at full capacity. Update on Glove City Project In the absence of gas supply, Supermax may look towards biomass to kick start its Glove City Project. However, we have been advised that the usage of biomass is only applicable for one out of the six planned factories. The remaining five factories will still be reliant on the availability of gas supply. In the worst case scenario, Supermax may opt for the purchase of new land with existing gas supply in order to continue their expansion plans. We view this news as positive it provides clarity towards Supermaxs future plans pending the eventual completion of Lot #6058 and #6059.

SUCB MK 7106 Main Market 679.2 1446.7 0.50 2.25/1.79 1910.0 53.1 1.4

Dato' Seri Stanley Thai - 20.44 Datin Seri Cheryl Tan - 15.13

Forecast Revision Forecast Revision (%) Net profit (RMm) Consensus TA's / Consensus (%) Previous Rating Financial Indicators Net gearing (x) CFPS (RM) P/CFPS (x) ROAA (%) ROAE (%) NTA/Share (RM) Price/ NTA (x) Share Performance (%) Price Change 1 mth 3 mth 6 mth 12 mth FY13 0.1 0.3 7.1 10.0 14.7 1.3 1.6 FY14 0.0 0.2 8.6 11.8 16.8 1.5 1.4 FY13 FY14 (4.6) 4.2 129.5 164.9 137.2 153.8 94.4 107.2 Buy (Maintained)

SUCB 8.1 7.0 10.9 (2.7)

FBM KLCI 1.4 4.7 10.5 10.2

(12-Mth) Share Price relative to the FBM KLCI

Source: Bloomberg Page 1 of 2

TA Securities
A Member of the TA Group

22-Jul-13

Changes to Earnings From the information gathered, we make the following adjustments to our model: 1. Taking into account the delays, we decrease our total FY13 year-end capacity from 23.13bn gloves/annum to 17.76bn gloves/annum. 2. We increase the total installed capacity for surgical gloves for FY14 from 174mn to 336mn. However, due to potential problems in regards to the availability of sterilization facilities, we only impute a utilization rate of 70%. 3. Given challenges in the Brazilian operations, we decrease our assumed share in profit of associated companies by 30%. Imputing these changes, we adjust our FY13/FY14/FY15 estimated earnings from RM135.7mn/RM158.3mn/RM161.0mn to RM129.5mn/RM164.9mn/ RM170.8mn. Undemanding valuations Incorporating higher FY14 earnings, we revise our TP upwards from RM2.60/share to RM2.70/share. Our valuation is based on a 20% discount to the industrys targeted PE multiple of 14x. The rationale for the imposed discount is due to the difficulties in obtaining gas supply with regards to their Glove City Project. Nevertheless, we believe our implied FY14 PER ratio of 11.2x is undemanding compared to the industry average of 14.3x (see Table 2). With a total potential upside of 30.2%, we reiterate our BUY call on Supermax.

Table 1: Earnings Summary FYE Dec 2011 Turnover 1,021.4 Pretax profit 112.1 Net profit 104.2 EPS (sen) 30.6 EPS growth (%) (34.5) PER (x) 7.0 Dividend (sen) 6.5 Dividend yield (%) 3.1 Table 2: Peers Comparison
Price (RM) Top Glove Supermax Hartalega Simple average
NTA/Share FY13 (x) 2.2 1.3 1.0 1.5 FY14 (x) 2.4 1.5 1.2 1.7 FY13 (x) 2.8 1.6 6.4 3.6

2012 997.4 137.3 121.7 17.9 (41.6) 11.9 5.0 2.3

2013F 1,224.4 149.5 129.5 19.0 6.4 11.2 5.7 2.7

EPS

2014F 1,450.5 190.3 164.9 24.2 27.3 8.8 7.3 3.4

EPS Growth

2015F 1,471.8 197.1 170.8 25.1 3.6 8.5 7.5 3.5

PER FY13 (x) 18.3 11.2 20.8 16.7 FY14 (x) 15.9 8.8 18.2 14.3
Div yield

TP (RM) 7.10 2.69 7.15 BUY BUY BUY

Mkt Cap RM mn 3,812.4 1,446.7 4,873.8 3,377.6

P/NTA FY14 (x) 2.6 1.4 5.4 3.1

FY13 (sen) 33.6 19.0 32.0 28.2

ROE FY13 (%) 15.6 14.7 33.8 21.4

FY14 (sen) 38.8 24.2 36.4 33.2

FY13 (%) 2.7 6.4 (42.0) (11.0)

DPS

FY14 (%) 15.4 27.3 13.8 18.8

6.15 2.13 6.64

Top Glove Supermax Hartalega Simple average

FY14 (%) 16.6 16.8 31.8 21.7

FY13 (sen) 17.2 5.7 14.5 12.5

FY14 (sen) 19.8 7.3 16.4 14.5

FY13 (%) 2.8 2.7 2.2 2.6

FY14 (%) 3.2 3.4 2.5 3.0

Disclaimer
The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein.
for TA SECURITIES HOLDINGS BERHAD(14948-M)
MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048

(A Participating Organisation of Bursa Malaysia Securities Berhad)

Kaladher Govindan Head of Research

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