SUPERMAX CORP BHD

Target price: RM3.10

ONE of the biggest investor concerns on Supermax is the stability of the management team, as its founder (Stanley Thai) was recently sentenced to jail for five years for insider trading (the case is on appeal).

The board had appointed Tan Chee Keong (Stanley’s nephew) and Cecile Jaclyn Thai (Stanley’s daughter) as executive directors to help ease concerns over the company’s succession planning.

AffinHwang Capital believes that the concerns have been priced into the current share price, and the result of the appeal is not likely to have further negative impact on the share price.

“Despite the concerns surrounding Supermax’s management team, we believe that it is business as usual for the company. Supermax, like its peers, will likely continue to benefit from the vinyl glove supply disruption in China, which should help drive its earnings growth for 2018,” it said.

The research house has raised its 2018 to 2020 earnings by 8% to 11% to factor in the better growth prospects.

“However, the consensus view is less optimistic on Supermax’s outlook, as the company’s annualised net profit based on the first quarter of 2018 is 10% higher than the consensus forecast; in our view, successful delivery of earnings growth would be the key re-rating catalyst for the stock in the near term.”

AffinHwang Capital has raised the company’s target price to RM3.10 (previously RM2.10) based on a higher multiple of 17.8 times 2018 price-to-earnings ratio (PER).

“Even at this higher target multiple, we believe that there is upside potential, as the stock would be trading at a 39% discount to the current sector forward PER of 29 times.

“Supermax has traded at a 16% discount to the sector since 2010.

“The biggest downside risk to our investment thesis would be even weaker-than-expected demand for gloves, longer time lag on passing through the higher production cost to its customers,” it said.