Thailand
Malaysia: Higher tax rate damper for Supermax
PETALING JAYA: CIMB Equities Research has cut Supermax Corp’s financial year (FY) 2018-2019 (forecast) estimates by 10.8% to 14.3% to account for a higher tax rate and higher operating expenses, especially in the contact lens segment.
The research firm said its “hold” call remains but its target price was lowered to RM1.74, still based on 12 times calendar year 18 price-to-earnings (P/E) five-year historical mean. The previous target price was RM2.
Supermax last closed at RM1.78, for a market cap of RM1.21bil.
“Although its price to earnings valuations are trading below peers, we think strong re-rating catalysts are lacking at this juncture while earnings visibility is weak. Downside and upside risks include weaker or stronger-than-expected glove sales volume.”
CIMB Research said while Supermax’s FY17 revenue grew 3.2% on-year to RM1.1bil, net profit declined to RM70.2mil or 33.2% on-year.
The weak performance was due to lower production output from revamp works conducted at the Kapar plant in the first half of FY17 and higher operating expenditure, including advertisement and promotion expenses for the contact lens division. Another reason was margin squeeze from the spike in raw material prices.
“Overall, FY17 net profit was below expectations, at 80.7% and 76.3% of our and consensus full-year estimates,” it said.
CIMB Research pointed out Supermax’s fourth quarter ended June 30, 2017 (4Q17) revenue rose 1.4% on-quarter, on the back of higher sales volume from its refurbished lines.
Earnings before interest and tax (EBIT) margins in the quarter grew 5.4 percentage points on-quarter to 11.9% as a result of the sharp decline in raw material prices and higher economies of scale (increased production).
However, net profit declined significantly to RM8.3mil (-57.8% on-quarter) as a result of a spike in effective tax rate to 66.5% (+58.8% on-quarter).
“We suspect that the high tax rate in 4Q17 is likely to be due to non-deductible tax expenses,” it said
Recently, Supermax’ highlighted that it has received the final approval for the installation of water meters for both Plant 10 and 11, and installation works should take a further two to five months.
Operations of plant 10 and 11 were affected by the lack of water supply over the past three years.
Upon completion, the water supply will be sufficient to run all 20 lines smoothly, including the remaining six lines in Plant 10 and 11 that are not yet operational. This should lift its capacity by 7.4% (1.6 billion per year) to 23.2 billion pieces per year.
CIMB Research said Supermax will also embark on a rebuilding and replacement programme starting in 3Q17.
This plan will require capital expenditure of RM333mil over three years, and involves revamp works on three of its older and less efficient plants.
“We estimate that the extensive revamp plans will lift total capacity by 10.2% by the second quarter of 2019 and will be in stages in order to prevent any significant loss of capacity.
Source: http://www.thestar.com.my/business/business-news/2017/09/01/higher-tax-rate-damper-for-supermax/#7mIH4dOoe4JlRXMk.99