Supermax Corporation Dec 2012

Updated Profile
It is still the second largest glove manufacturer in Malaysia after Top Glove Corporation Bhd. It's 10th and 11th manufacturing plants have started and is commissioned in stages starting Sept 2012 and will be fully operational by Q4'2013. By then it would more than double the group's nitrile capacity from 5.2bil pieces per annum to 10.5bil hence the group's total installed capacity to be on 52% nitrile gloves and 48% natural rubber gloves. This is important because the new plants have inter-switchable lines between the production these two types of gloves, thus enabling the group with flexibility to meet the shift in global demand.

Fundamentals

Net profit margin (red) is in line with my previous ~10% expectation. Revenue growth rate has been slugging no thanks to declining raw material price that suppresses gloves average selling price (ASP).

5-year average financials comparison (Supermax vs Industry vs Sector). Sector refers to Trading/Services while industry is more specific; Rubber Products. Sector is rather general can be ignored safely but is listed here for reference sake.

#Valuation Ratios
P/E Ratio High Last 5 Yrs: 12.50 vs 28.03 vs 63.56
P/E Ratio Low Last 5 Yrs: 3.59 vs 15.68 vs 13.23
-Supermax's PE ratio is reasonably low and is one indicator it is undervalued.  

#Dividends
Dividend Yield 5 Yr Avg: 1.84% vs 1.22% vs 1.74%
Dividend 5 Yr Growth Rate: 20.04% vs 7.11% vs 11.85%
-Supermax's potential in dishing out more dividends will be explained later on. 

#Growth Rates
Sales 5 Yr Growth Rate: 20.60% vs 6.55% vs 13.19%
EPS 5 Yr Growth Rate: 16.98% vs 2.02% vs 5.20%
Capital Spending 5 Yr Growth Rate: 12.35% vs 5.01% vs 10.10%
-Supermax's has a good track record on growing and with its expansion plans being on track to double production and boost future earnings.

#Profitability Ratios
Gross Margin 5 Yr Avg: 27.87% vs 44.39% vs 56.76%
Net Profit Margin 5 Yr Avg: 11.76% vs 7.96% vs 12.45%
-Supermax's has held steady on it's net profit margin ~10% either thus cost saving measures or offsetting prices with volume sales.

#Management Effectiveness
ROA 5 Yr Avg: 10.50% vs 6.46% vs 9.18%
ROE 5 Yr Avg: 19.28% vs 11.31% vs 13.92%
-Supermax has better management team vs competitors.

For more financial comparisons refer to Reuters (click here). For my original posting back in Jan 2011 (click here).

Supermax continues to show good value creation on its EPS. It does not have a dividend policy but for the past 3 years the payout ratio has seen to be hovering around 25% thus I would expect roughly ~4sen/share for 2012/2013.

Discounted Cash Flow Analysis

Projected Revenue Growth Rate: 10%/each year for the next 5 years til 2017

Operating Costs: 90%

Corporate Tax: 25%

Capital Expenditures: RM35 million +2%/year 

Depreciation: RM25 million +2%/year

Working Capital Cost: same as projected revenue growth rate

Discounted Rate: 15%

Supermax's fair value is priced roughly at RM2.75. By standards, the current stock price of RM1.95 makes is amazingly cheap to acquire. How does it stake up with it's "top competitors" in Malaysia then?

As you can see Supermax is ranked somewhere in the middle of the crop, the key differentiator being its low PE ratio. When valuations of other rubber manufacturers get too high, money has nowhere else to go but to the cheaper ones and Supermax has the upper hand compared to Kossan. Hartalega is particularly interesting and has been in my watchlist for quite time and will be researched. Supermax's DE ratio will be discussed later.

Technical Analysis

Supermax has been trading sideways for a long time since September 2012. One reason might be its disappointing Q3 results owing to a 18.9% lower earnings from reduced profit contribution from associated companies as new entrants tried to gain market share in the competitive market. Nevertheless from its recent investor event, management guided that results should improve in Q4 due to stronger sales volume for year end quarter. As such I am expecting at least a 10% revenue growth to RM121 million for financial year ending 2012. This should bode well for the stock price and from indicator the 12-day EMA to 26-day EMA gap has begun to shrink recently.

Investor Risks
#1 Nitrile glove margins will keep falling due to increase in capacity by all players as well as competitive pricing. This is inevitable so Supermax is switching to ultra-thin gloves and wants consumers to begin to adapt to it. It has the newer production lines to take advantage of this new market segment.
#2 Because this industry relies on low skilled workers, minimum wage would raise cost and Supermax has estimated it will cost them RM1 million a month once the minimum wage policy kicks in January 2013. However the company is embarking on a programme to automate its processes and management believes it will save the company RM20-25 million a year, far more needed to offset minimum wage impact.
#3 Supermax has the highest debt to equity ratio among the top 5. It has been able to maintain such ratio for the past 5 years and is not expected to increase it. However with debts to service Supermax would not pursue any avenue of M&A to grow and has been confirmed by its management in the recent investor event.
  
Conclusion
I strongly believe that Supermax is a forward thinking company as it differentiates itself by not competing in the red ocean as well as to increase profit margin by other means such as automation. With latex prices expected to remain stable for YR2013, gloves average selling prices are also expected to remain soft on the back of weak material prices. Supermax is employing the above strategies to keep profit growing. The other thing worth nothing is Supermax's PE of 11.44 is trading among the lowest within its industry's average of 15.23. Following recent assessments and revised DCF figures Aboi puts SUPERMX as:

Target price: RM2.75 TRADING BUY
Fundamentals: Medium Term Outperform (3-year period)
Technical: Medium Term Bullish (6-month period)
Risk Level: High

Disclaimer: The reports, analysis and recommendations in this blog are solely my personal views. I do not link to any investment body or company. As such, I will not be responsible of any of your investment decision. Consult your investment adviser or come to your own conclusions before making any investment decision.

Genting Berhad Dec 2012

Updated Profile
The leisure and hospitality giant now has operations in Malaysia (and has proxy to Resorts World Manila via GENM), Singapore in Sentosa Island, UK being the biggest operator controlling 44 casinos and the USA by opening Resorts World New York in October 2011. It is now looking to expand in Japan and South Korea. Genting is now considered a global major player in the gaming industry. 

Fundamentals

Net profit margin (red) is in line with expectation of 25% to 30%. Revenue jumped from RM9 billion to RM15.2 billion in 2010 and for the year 2010 to 2011 it also grew from RM15.2 billion to RM19.6 billion supported by operations in GENS. This explains the explosion in growth rate (orange). 

5-year average financials comparison (Genting vs Industry vs Sector). Sector refers to Trading/Services while industry is more specific; Gaming. Sector is rather general can be ignored safely but is listed here for reference sake.

#Valuation Ratios
P/E Ratio High Last 5 Yrs: 26.10 vs 51.94 vs 30.48
P/E Ratio Low Last 5 Yrs: 13.58 vs 19.00 vs 9.42
-Genting's PE ratio is reasonably low and is one indicator it is undervalued.  

#Growth Rates
Sales 5 Yr Growth Rate: 24.96% vs 7.57% vs 8.84%
EPS 5 Yr Growth Rate: 13.42% vs 5.52% vs 17.80%
Capital Spending 5 Yr Growth Rate: 49.39% vs 2.40% vs 4.33%
-Explosion in revenue due to GENS as expected.

#Profitability Ratios
Gross Margin 5 Yr Avg: 40.64% vs 55.89% vs 27.11%
Net Profit Margin 5 Yr Avg: 22.96% vs 7.31% vs 6.08%
-Genting's profit margin has been steady between 20% to 30% as evident from my chart above.

#Management Effectiveness
ROA 5 Yr Avg: 7.23% vs 4.63% vs 6.57%
ROE 5 Yr Avg: 12.88% vs 10.32% vs 12.28%
-Genting has better management team vs competitors.

*I skipped Dividends and Financial Strength for the Risks section later.
For more financial comparisons refer to Reuters (click here). For my original posting back in Oct 2010 (click here).

Genting continues to show good value creation on its EPS, however it has not announce a dividend policy yet and prefers to use its fund for in-house expansion (potentially Japan and South Korea).

Discounted Cash Flow Analysis

Projected Revenue Growth Rate: 5% (for 2012) and 8% for the years ahead

Operating Costs: 70%

Corporate Tax: 25%

Capital Expenditures: RM5 billion +3%/year 

Depreciation: RM1.5 billion +3%/year

Working Capital Cost: same as projected revenue growth rate

Discounted Rate: 15% 

Genting's fair value is anywhere between RM12.27 to RM14.27 as such I put it as RM13.22. As long as Genting continues to pump funds into capital expenditure causing high Net Investment (12%), valuation will be slightly hampered. Historically it was a modest percentage of 5 until the company went into high gear expansion mode after the son took over the business.

Technical Analysis

In the near term (3 months) GENTING should be bullish unless it challenges the support line at RM9.15. Having said so their financial year reporting for 2012 might has some impact on the trend, we will see.

Investor Risks
#1 Macau casinos (all six big boys) are entering their 2nd phase of expansion and this time encroaching into the mass market as the lucrative VIP market saw a marked decline in both Macau and Singapore. Because Macau has more casinos compared to Singapore it has more appeal.
#2 Monetary Authority of Singapore is continues to allow gradual appreciation of the Sing Dollar to combat inflation making it more expensive for lodging and gaming in the city state.
#3 Genting is looking to further expand in Japan and South Korea and has made those plans public. No dividend policy is expected to be announced and the potential for higher gearing is also expected. DE ratio currently is manageable at 0.80 down from 0.97 back in 2009. 

Conclusion
Singapore will continue to count on high tourist numbers to drive consumption within the country. This is business as usual for them and having the same interest will bode well for Genting. Genting Singapore is now the main revenue contributor for the group having almost a 50% share of it and its performance is to be closely watched. With the company's estimation of an increase of 1 million tourist to RWS for 2013 to 17 million people, revenue is expected to increase. Most research houses (click here) are putting a BUY call on Genting with an average target price of RM10.88 and as mentioned earlier their target price could be hampered by the high capital expenditure Genting is pumping for expansion and will continue for the coming year. Following recent assessments and revised DCF figures Aboi puts GENTING as:

Target price: RM13.22 BUY
Fundamentals: Long Term Outperform (5-year period)
Technical: Short Term Bullish (3-month period)
Risk Level: Medium-High

Disclaimer: The reports, analysis and recommendations in this blog are solely my personal views. I do not link to any investment body or company. As such, I will not be responsible of any of your investment decision. Consult your investment adviser or come to your own conclusions before making any investment decision.

Aboi's Updates for Dec 2012

For those who find it hard to follow I suggest reading through my previous posting on how I am using technical indicators as a trend seeker.

1. First Attempt on Tech Analysis Part 1
2. First Attempt on Tech Analysis Part 2

Bursa has been bearish since the concluded US elections in Nov 4 and the "fiscal cliff" drama that has been unfolding. Up until the recent week things look to be improving as evident from the indicators. RSI indicator has finally broke the 30 and if momentum is supported could break 50 suggesting a true reversal trend. This impeding reversal is also supported by the 10-day EMA to 20-day EMA line, having seen the gap being reduced and if any indication of recovery we could see a crossover next week. Hence for the coming weeks we should look at the Support line for 1610 and Resistance to break at 1645. If things go bad the 2nd support line of 1590 should be taken seriously.

Spent two hours revising my portfolio outlook. Versus my older table I have streamlined it to provide more valuable information (benchmark, DCF fair value, ratings, dividends and basic portfolio information). *Note that the DCF values have been updated since Oct 2012 (in which I will post my re-evaluation articles in the coming weeks). Key updates for this month:

#1 Supermax and Genting continues to market outperform and is still a bargain. 
#2 Undecided to hold or sell Jobst due to an expected weak job market in 2013. Will hold until ex-dividend date Dec 10 and decide to sell by year's end.
#3 Freight is on hold until it appreciates. International trade outlook in 2013 does not look promising due to lack of demand.
#4 Boustead is on hold due to correction in CPO prices now. I am expecting commodity prices (gold as well) to go up higher in 2013 due to expected low interest rates.
#5 Maintain buy on iCap due to huge stock price vs NAV price.
#6 Maintain buy on SIF as bond market would continue to do well when low interest rate is maintained.
#7 Portfolio is on par with benchmark but my target is for it to perform better with a value of RM132,000. 

Trending to lose my goal for this year due to #1. Anyway for the coming weeks I would be looking into getting another or two equities into my portfolio (in event I sell Jobst), one more mREIT and another mutual fund. Cash is king now!! 2013 isn't any better than 2012 so we have to be cautious.

As an extra, my choice of BSDReit (Post) back in Aug 2010 has paid off handsomely as it has been the best performing mREIT in terms of total returns. Other previous articles: MREITs Part 1 and MREITs Part 2

Disclaimer: The reports, analysis and recommendations in this blog are solely my personal views. I do not link to any investment body or company. As such, I will not be responsible of any of your investment decision. Consult your investment adviser or come to your own conclusions before making any investment decision.