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.