Supermax (Current Price: RM2.25; TP: >RM2.70): Super laggard (As described by Maybank today)

After the sell-off over the past two days, I feel more comfortable recommending this stock now. In addition, many stocks have moved up a lot over the past one year but Supermax just managed a paltry 8.3% increase over the past one year. This pales in comparison to Kossan's +83.4%, Hartalega's +52% and Top Glove's +15.7%. Therefore, I think it's quite safe to go in at current levels.

As you all might have already known, one of the main reasons for the poor performance was Stanley Thai's support for Pakatan Rakyat during the recent general elections, coupled with its weaker margins in the previous quarter (1Q13) which raised investors' concern over its ability to pass on higher costs to its customers.

However, I feel Supermax's discount to its peers is unjustified. Maybank correctly stated in today morning's report that Supermax is a super laggard. Just compare Hartalega's PER 2012-13 of 20.5x/19.5x, Top Glove's 17.7x/17.3x and Kossan's 16.2x/14.5x with Supermax's  pathetic 12.2x/10.8x, Supermax is trading at a whopping 35% discount or more to its peers. How can???

With the appreciating USD, raw materials remaining relatively low and stable, its anticipated recovery in its profit margins in 2Q13 coupled with its expansion in the end of this year and  greater automation of its manufacturing processes, Supermax is poised to rerate and catch up with its peers. Stanley's political alignment is a non-issue to me as most of its products are exported to overseas anyway and are not dependent on local demand.

Valuation: Fair value could easily reach above RM2.70 by attaching PER of 12x to its EPS for 2014. And that is still at about 20% discount to its peers. The stock is highly liquid which is favourable among institutional investors. Definitely a stock to watch out for!

Some updates from various research houses:

Nitrile glove expansion:  Growth  is  expected  to  come  from  12  replacement lines and 2 new plants over FY13 and FY14.  The Company has plans to increase nitrile production  capacity  from  6.9  billion  pieces  to  12.3  billion  pieces  per  annum,  52%  of the  total installed capacity. These additional nitrile production lines have  the ability  to switch  between  nitrile glove and  natural  rubber glove  production.  As  of  now,  12  new nitrile  lines  with  1.43b  pieces  additional  capacity  is  already  commercially  operational. The  remaining  planned  production  lines  are  on  track  for  commercial  production gradually, starting  from 4Q 2013 instead of 3Q 2013. Due  to strong demand  for nitrile gloves,  Supermax  is  currently  facing  an  oversold  position  of  two  to  three  months.  In addition, the latest quarterly results by Hartalega (Nitrile glove producer) revealed that global  demand  for  nitrile  gloves  will  be  robust  with  around  20%  growth  annually  in

2013-14.

Strengthening USD will benefit glove manufacturers: Supermax is a beneficiary of  the  weakening  of  the  Ringgit  since  they  do  not  hedge  its  US  dollar  receipts.  Since sales are USD  denominated,  theoretically, a  depreciating  ringgit against  the  dollar will lead to more ringgit revenue receipts. A 1% depreciation of RM against USD is expected to boost net profit by 1-2%.

Margins to improve:  Management  has  guided  that  1QFY13  margin  erosion  is one-off  and  unlikely  to  recur.  Instead,  2QFY13  results  to  be  released  in  Aug  2013  is expected to show margins improvement compared to 1QFY13 as the lag effect in raising ASPs wore off starting from 2QFY13. 1QFY13 margins fell due to higher labor expenses arising  from minimum  wage  policy  and  the  higher  cost  was  not  fully  passed  on  to  its customers. Typically, customers are given two to three month notice before new ASPs can  take effect. As such, margin  recovery will start due  to an estimated 3-5% increase in ASPs, already  notified  to  customers in  Jan  2013, which will kick in  from  the  second quarter onwards.


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Fight the Smear Campaign against the Oil Palm Industry - Koon Yew Yin

Source: www.malaysiafinance.blogspot.com

By Koon Yew Yin

A few weeks ago the sky was covered with smoke from the burning of forests in Sumatra to clear land for agriculture. Many in Malaysia and Singapore were affected by the haze. Some observers in the west used it as an occasion to bad-mouth the oil palm oil further. In this article, I will try to share some facts of life in the oil palm industry so that Malaysians will not join the western world in their smear campaign.

Firstly, we must remember that the west had cut down their forests and trees centuries ago to develop their countries. Malaysia and Indonesia are both new comers in the development scene and have been felling our forests for only a few decades now. Of our tropical agricultural crops, oil palm is the most recent cash crop commodity.

Although there has been a rapid rate of exploitation, it still occupies a small proportion of our total land area. The oil palm industry in Malaysia accounts for 15.5 per cent of total land area and only 4.5 per cent of total land area of Indonesia. A large proportion of the oil palm plantations are also not newly felled forest but are old rubber plantations that have been converted to this more lucrative crop.

Many in the public know of my views which are critical of many developments in the country. However, praise needs to be given when it is deserved; and our home grown oil palm industry is one which deserves all our support. This support is important in view of the sustained criticism made against the oil palm industry by lobby groups that have their origin in the west.

Why We Should Support Our Oil Palm Industry

There are many good reasons to support our oil palm industry in Malaysia and Indonesia. These are some of the most important.

1. Firstly it is not only Felda settlers that are dependent on the crop for a livelihood. Malaysia’s annual US$25 billion (RM79.75 billion) palm oil exports support some two million jobs and livelihoods along the sprawling value chain. This means that one in every five working Malaysian is dependent for his or her livelihood on the crop. 

2. Plantations have borne the brunt of the bad publicity. However, the small farmers are also affected. More than 40 per cent of oil palm planters in Indonesia are smallholders whilst in Malaysia they contribute to 38 per cent of the country’s palm oil output.

3. Environmental activist groups such as World Wildlife Fund, Friends of the Earth and Greenpeace have launched many campaigns alleging that the expansion of oil palm plantations have destroyed forests, threatened endangered wildlife and robbed indigenous peoples of their land. Many of their arguments are not based on fact but are sensationalized from a small and atypical number of cases.

4. The anti-oil palm lobby in the west includes pro-soya bean and rape-seed groups who see oil palm as a major competitor and have recruited food lobbyists to play on fears of the health hazards of palm oil consumption. . Together with environmental activists, these well-funded groups have created trade barriers to the global oil palm trade under the pretext of environmental activism. 

5. In a fair contest amongst competing vegetable oils, palm oil will win hands down. The oil palm tree is the world’s most efficient oil crop because one can harvest five tonnes of oil per hectare. This is 10 times more productive than soya bean planted in the West, including United States and five times more productive than rapeseed, Europe’s main oil crop.

6. It is an undeniable fact that palm oil is the cheapest and most popular form of cooking oil for consumers, including many poor families in the west. Should trade barriers to benefit rapeseed farmers who are already heavily subsidised by the European Union (EU) government be successfully implemented, this will hurt consumers all over the world. 

7. Also should alternatives to oil palm be grown, more land would be needed to produce an equivalent volume of oil to replace palm oil, resulting in more deforestation and problems for Mother Earth.

8. Oil palm smallholdings and plantations meet the United Nation’s Framework Convention on Climate Change which defines a forest as an area of 0.5 to one hectare having more than 30 per cent canopy cover and having a potential height of two to five metres. To accuse the industry in Malaysia and Indonesia of contributing to global warming is sheer nonsense. In fact oil palm trees just as with other forest species, produce oxygen for us to breathe and act to counter coal and oil emissions which are the major cause of global warming. 

9. Finally, the western environmental activists’ campaign against oil palm plantation expansion, in the name of “saving rainforests”, is a violation of international norms and Malaysia’s and Indonesia’s sovereignty. 

Appeal to Malaysians 

In a keynote address to over a thousand delegates at a conference organised by the Incorporated Society of Planters (ISP) in Sibu, Sarawak, recently, Datuk Amar Abdul Hamed Sepawi, Chairman of Sarawak Plantation Berhad warned, “We’re at a crossroads. It’s time for oil palm planters to adapt to the fast-changing world of ruthless vegetable oil politics if we want to stay relevant in this market”. 

Conclusion:

I trust all Malaysians will circulate this article to all their contacts to fight against the smear campaign against our palm oil industry and eventually I hope consumers, all over the world, will not buy soyabean or rapeseed oil which is more expensive and not really superior to palm oil.

SCMP: China's stock market woeful performance

A phrase from an article by Tom Holland in SCMP today which quite accurately describes the China's stock market performance which is still trading at where it was 13 years ago. 

"China's stock markets did not evolve as places where private companies could raise long-term capital from investors prepared to risk their savings for superior returns. 

Instead they were set up by the Communist Party to further its own political aims of reforming China's state-owned enterprises to ensure their continued dominance over the economy. 

As a result, the listing rules were drawn up explicitly to favour big state-run corporations in sectors considered strategic by Beijing, with private companies in China's fast growing service economy largely excluded."

As for Hong Kong market which is considered a proxy to China, Hong Kong has attached itself so much to China in everything that the Hong Kong market largely follows China's dismal stock performance, unfortunately. This includes Hong Kong's economy which cater much to China's consumers and in a way ignores the rest of the world. Now that China's economy is starting to slow down, owing to its own insatiable appetite which is causing overcapacity, over-leveraging, over-expansion, over-bought overseas resources/assets and over-everything, Hong Kong's economy and stock market have to bear China's slowdown. Many are becoming optimistic about HK/China's markets as they are so dirt cheap, I'm not optimistic on the other hand.