Supermax Corporation

Target RM5.30
Previous RM4.68
Price RM3.60

Supermax shed more light on the glove industry outlook and its earnings going forward. We gather that demand still outpaces supply, mainly due to the lack of new capacity since mid-2008. Supermax has started on a capacity expansion programme that will ramp up total annual capacity to 21.7bn pieces by 2010 from 14.5bn pieces currently. Management has also guided for more dividends in tandem with its fine performance. We have upgraded our FY10 earnings by another 13% in line with guidance and hence raise our target price to RM5.30 (previously RM4.68).

Global demand growing by about 10bn pieces a year. According to Supermax’s management, global rubber glove demand for 2009 is at 135bn pieces p.a. (Top Glove has estimated 140bn pieces p.a.) and should increase by 10bn pieces a year. On top of this, the H1N1 pandemic is also envisaged to boost demand by another 8bn pieces p.a., which brings total demand to more than 150bn pieces of gloves by 2010. With glove makers holding back on capacity expansion from mid-2008 to mid-2009 owing to uncertainties over
the health of the global economy, the industry believes the new capacity in the global market was less than 5bn pieces p.a, which gives rise to the current global scarcity of rubber gloves. In the shorter term, most rubber glove manufacturers also expect the shortfall in rubber glove supply to prolong as the industry has not obtained new natural gas supply. Hence, any expansion would mostly be limited to the scrapping of old production lines and adding new lines to their existing facilities to utilize the available natural gas. Also, we understand that a biomass boiler – should glove makers opt to use one - would take about 12-15 months to be ready for use.

Capacity expansion in motion. Currently, Supermax’s total annual capacity is at 14.5bn pieces p.a, which management expects to increase by 3.1bn and 4.1bn pieces p.a. by 2009 and 2010 through organic growth. Total annual capacity will hit 21.7bn pieces by end-2010.

Ready for production cost increase in the future. Latex price has been on a rising trend in tandem with the rise in crude oil price. Apart from passing on the cost increase to its customers, we believe Supermax is prepared for higher latex prices as the company’s efforts to enhance production efficiency is bearing fruit, whereby: 1) natural gas cost has been cut by 4% YTD, and 2) electricity cost is down 6.4% YTD, even as output has climbed
12% from 10.8bn pieces in FY08 to 12.1bn pieces in FY09.

By OSK188
Analyst: Jason Yap